UK to see more persistent inflation than EU, Bailey warns

UK to see more persistent inflation than EU, Bailey warns
Andrew Bailey, Bank of England Governor, speaking at the European Central Bank conference

The governor of the Bank of England has warned that the UK should expect to see more persistent inflation than its European counterparts.

Speaking at the European Central Bank conference in Portugal on Wednesday (June 29), Andrew Bailey said the structure of the energy price cap will mean a further shock to the economy is expected when it is reviewed in October this year.

“There is going to be a further step up in UK inflation this year, because of the energy price cap,” he said.

“It is a common shock in geographical Europe because it is a single supply system, [but] other things equal, you can imagine [the energy price cap] will put a bit more persistence in inflation.”

Bailey remained bullish on the central bank’s ability to control inflation, saying “the key is to bring inflation back down to target and that is what we will do”.

Inflation has missed the BoE’s 2 per cent target each month since May last year and hit a 40-year high of 9 per cent in May.

The figure is expected to hit 11 per cent this autumn.

Bailey declined to predict the action the monetary policy committee would take at its next meeting, though he said the bank had noticed the causes of inflation had begun to shift in the past few months.

“[We have seen a] shift in the makeup of inflation from a goods and supplies shock to an energy and food shock,” he said, highlighting the economic impact of the war in Ukraine.

'BoE bottles it'

The FTSE fell nearly three per cent earlier this month after a less-than-cheery economic update from the Bank of England.

The FTSE 100 fell 2.99 per cent in trading on June 16, after the central bank’s monetary policy committee raised the base rate of interest by 0.25 percentage points, to 1.25 per cent.

This is despite rate setters in the US hiking rates by 0.75 percentage points, and warning that faster, quicker rate hikes might be necessary amid spiralling inflation.

Three MPC members voted against the rise, instead requesting a 0.5 percentage point increase.