WASHINGTON: Bank of England Governor Andrew Bailey said inflation pressures might require a bigger interest rate increase than it previously thought because of the government’s huge energy subsidies for households and businesses, and its tax cut plans.
“We will not hesitate to raise interest rates to meet the inflation target,” Bailey said on Saturday at an event on the sidelines of the International Monetary Fund Meetings in Washington.
“And, as things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.”
The BoE is due to announce its next decision on interest rates on Nov. 3 and many investors think it will either raise them from their current level of 2.25% to 3% or possibly 3.25%, both of which would be much bigger moves than usual.
Bailey said the BoE would assess the impact of the government’s energy support scheme and the Oct. 31 budget statement of new finance minister Jeremy Hunt, who was named on Friday after Kwasi Kwarteng was fired after a month of financial market turmoil triggered by his tax cut plans.
UK corporation tax set to rise to 25%
“The MPC (Monetary Policy Committee) will respond to all this news at its next meeting in just under three weeks from now,” he said. “This is the correct sequence in my view. We will know the full scope of fiscal policy by then.”
Prime Minister Liz Truss on Friday scrapped a freeze in corporate tax rates and said she would instead allow them to rise from April, as planned by Britain’s previous government. She also said spending would rise by less than planned.
Hunt said earlier on Saturday that some taxes might have to rise and others might not fall as much as planned.
Bailey said the BoE was able to operate monetary policy - chiefly interest rates - to manage the economy and also make financial stability interventions to address issues such as the recent surge in British government bond yields that threatened some pension funds.
The BoE ended its emergency bond-buying on Friday.
“In these difficult times, we need to be very clear on this framework of intervention,” Bailey said.
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