The governor of the Bank of England has defended its 2 per cent inflation target after the prime minister said she would review its mandate.
In a Treasury committee evidence session yesterday (September 7), Andrew Bailey was asked by committee member Angela Eagle whether the BoE’s remit is outdated.
“I think the inflation target, and the nominal anchor we get from that, is very important and has proved to be very successful over the years,” Bailey said.
Earlier this summer, Liz Truss said she would "look again" at the central bank's mandate to "make sure it is tough enough on inflation".
Inflation has overshot the BoE's target since May last year, most recently hitting 10.1 per cent in the twelve months to July.
In the same session, the bank’s chief economist indicated that the potential freeze in energy prices could lead to a hike in interest rates.
Huw Pill said, when asked whether fiscal policies will generate inflation, that the bank’s remit was to ensure inflation remains at 2 per cent.
“We do have work to do,” he told the committee.
However, Kevin Hollinrake, MP for Thirsk and Malton, asked governor Bailey why it was raising interest rates, given that a combination of high energy prices and a high base rate of interest this winter would be a double blow for households.
“By your own admission, what you are doing is not affecting the principal drivers of inflation, yet you’re going to…probably drive the economy into recession by increasing interest rates, and put households under a huge amount of pressure,” he said.
“What’s the point, just to get inflation back to target a few months earlier?”
Bailey fired back that Vladimir Putin will be the one responsible for putting the UK into a recession, not the MPC.
He added that the current market conditions represent the biggest shock faced by the bank.
“[High inflation] does not suggest that the regime has failed, it suggests the regime now has to do its work and respond to a much bigger shock.
“I am confident it will do so.”