The governor of the Bank of England has hinted that the base rate of interest could be hiked before the end of the year.
In a speech at the Society of Professional Economists' annual dinner yesterday (September 27), Andrew Bailey said the members of the monetary policy all agreed that Covid-related stimulus should end at some point with a base rate hike.
This programme began in November 2020 as a result of the pandemic, and is due to end in December this year.
He said: "If appropriate [the base rate hike] would not need to wait for the end of the current asset purchase programme."
But he said the economy was not strong enough for an immediate hike.
The central bank's monetary policy committee last week (September 23) voted unanimously to maintain the base rate of interest at 0.1 per cent, despite the rate sitting above the bank’s target each month since May.
Inflation jumped to 3.2 per cent in the 12 months to August 2021, up from 2 per cent in July, making it the largest ever recorded increase.
Bailey said he still believes price pressure and the resulting inflation will be transient: “ a lot...turns on how effectively supply capacity is rebuilt and over what time, and how the labour market works”.
He added although the economic impact of Covid had faded, the switch of demand from goods to services had not taken place on the scale expected, and supply bottleneck and labour shortages had hampered the country’s output.
He said: “Indeed, the number of high profile supply bottlenecks appears to be increasing. I must say that when I heard that we were suffering a shortage of wind to generate power, I was tempted to ask, 'and when are the locusts due to arrive?'.”
Bailey added he does believe demand will shift back from goods to services, global supply chains will likely to repair themselves, and "many commodity prices have demonstrated mean reverting tendencies over time."
In his speech, the governor highlighted that although the high rise of inflation seen in August was due to base effects, going forward major contributors will be goods and energy prices.
As a result of inflation overshooting the BoE’s official 2 per cent target in August, Bailey was required to write to chancellor Rishi Sunak explaining the reasons behind the rise.
He blamed base effects for the rise, which included the reduction in prices last August as a result of the government’s “Eat Out to Help Out” scheme, as well as temporary VAT cuts.
In the speech yesterday Bailey said: “The major contributors to the further increase are not base effects but rather the strength we are now seeing in goods and energy prices.
"The pressures are very much still with us, and there is still we believe pass-through to retail prices to come, and manufacturers’ output prices are still rising rapidly.