Bank of England  

Monetary policy alone cannot control inflation, Bailey warns

Monetary policy alone cannot control inflation, Bailey warns

Monetary policy cannot control a number of the drivers of high inflation in the UK, the governor of the Bank of England has warned.

Speaking to the Treasury committee yesterday (January 19), Andrew Bailey said monetary policy cannot bring the price of gas down, or increase labour supply in the market.

“In terms of global supply chains, that obviously is not something that any monetary policy is going to directly affect,” he said.

Bailey added that rising gas prices especially were pushing the rate of inflation up.

“The gas price story, which is a European story, is not something we can deal with. 

“I’m not saying that the UK government can deal with it on its own but it is a very serious issue,” he said.

Inflation has risen above the Bank of England's 2 per cent target each month since May last year. In December it rose by 5.4 per cent, the highest level of increase since March 1992.

A large portion of this was down to energy prices, which have soared in recent months, and could jump again in April when the energy cap is lifted.

Other factors pushing the rate of prices up include disruption to global supply chains due to the pandemic, as well as low levels of unemployment.

Interest rate decision

The BoE surprised markets in December by raising interest rates to 0.25 per cent from their historic low of 0.1 per cent.

In the committee meeting, Bailey said the monetary policy committee was in the very early stages of its next forecast and interest rate decision, due on February 3.

The central bank’s rate setters will decide whether a further increase in interest rates is needed to curtail rising inflation rates, which the bank thinks will hit 6 per cent in April, or whether this will hamper the post-pandemic economic recovery.

He said the committee was aware of the difficulties of managing a high inflation and low unemployment rate environment. 

“There is a very tight labour market...and that obviously is a concern, because that is putting a lot of pressure on the labour market, [and it] has got the potential to put a lot of pressure on earnings and wage negotiations.”