The recent strains in the banking system will not stop the Bank of England from raising interest rates if inflation continues to remain high, the bank’s governor has said.
Speaking at the London School of Economics yesterday (March 27), Andrew Bailey said the UK banking system is “resilient, with robust capital and liquidity positions, and well placed to support the economy”.
He said the central bank is “very alert” to any signs of persistent inflationary pressures, and will continue to raise rates if inflation remains high.
Responding to questions after the speech, according to the Financial Times, Bailey said none of the recent wobbles in financial markets had prompted the members of the monetary policy committee to decide tensions needed soothing.
However, in his speech Bailey noted that the high base rate of interest is being felt by households and businesses across the UK.
“I am afraid that monetary policy cannot make the shocks to our national real income go away,” he said.
“But what monetary policy can – and must – do is to make sure that the inflation that has come to us from abroad does not become lasting inflation generated at home.”
Bailey also highlighted the lagged effect of monetary policy, saying it takes times for changes in the base rate of interest to work through the financial system to loan and mortgage rates, and for those changes to affect the decisions of households and businesses.
“This means that the MPC needs to look ahead and focus on the outlook for inflation, as much as on its current level, when deciding the appropriate level of [the] bank rate today.”
Inflation unexpectedly accelerated in February to 10.4 per cent, higher than the BoE and analysts’ expectations, and more than eight percentage points above the central bank’s 2 per cent target.
The BoE raised interest rates by 25 basis points last week (March 23), despite concerns this could cause more trouble in the banking sector.
The collapse of Silicon Valley Bank, and resulting “shotgun marriage” of UBS and Credit Suisse, to save the latter from also collapsing, have all been blamed on the speed of interest rate rises in the US.
The MPC noted that there have been "large and volatile" moves in global financial markets since the collapse of SVB, reflecting market concerns about the possible broader impact of these events.
However, the BoE's financial policy committee, which has briefed the MPC, said the UK banking system maintains robust capital and strong liquidity positions.