Bank of England Governor Andrew Bailey raised the possibility of raising interest rates by half a percentage point in early August as he toughened the central bank’s language on tackling rising prices.
Bailey said the central bank’s Monetary Policy Committee had an “absolute priority” to get inflation back to its 2 percent target and faced the “biggest challenge” to controlling inflation since the bank gained independence in setting interest rates. in 1997
With June inflation data likely to rise to a new 40-year high of at least 9.3 percent on Wednesday, Bailey laid out the policy options being considered by the MPC.
A half-percentage point rate hike would be the biggest increase since 1995. The governor also raised the BoE’s view for the first time of selling some of the assets it has bought through rounds of quantitative easing since 2009.
“In simple terms, this means that a 50 basis point increase will be among the options on the table when we next meet,” Bailey told an audience of financial and business leaders at the annual dinner at Mansion House in the City of London.
Financial markets are increasingly expecting the European Central Bank to also raise its key interest rates by half a percentage point on Thursday.
Bailey said there was no guarantee the increase in the UK would be as large, adding that the committee would have to take into account the easing of bottlenecks in the global supply chain, as well as higher gas, food and fuel prices since the invasion of Russia in Ukraine.
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“We’ve been clear that we see the balance of risks to inflation as upside,” Bailey said.
The governor acknowledged that the rate rise would come at a time when people in the UK are getting poorer and struggling to access basic needs, saying the BoE already took this into account when setting monetary policy.
As for asset sales, Bailey has set a fairly aggressive timetable for reducing the level of government bonds it has bought, which peaked at £895bn.
“Based on an analysis carried out in conjunction with colleagues in the debt management office, we are currently looking at an overall reduction in hog stocks. . . in the region of £50bn-£100bn in the first year,” Bailey said.
While the governor acknowledged the challenges of tackling inflation, Chancellor Nadhim Zahawi threw a protective arm around the BoE, saying it had a “strong track record” in controlling prices and had all the necessary tools to succeed.
The bank has faced criticism from Tory leadership contenders, including Liz Truss, the foreign secretary, who has said she would strengthen ministerial control over its activities if she became prime minister.
Meanwhile, Zahawi confirmed the government was considering taking powers to “intervene in financial regulation in the public interest”, a plan that has angered Bailey, who wants to preserve regulatory independence.
But Zahawi said the government would consider all arguments before making a decision; the move is so controversial that any change to the rules will be left until September, when a prime minister and possibly a new chancellor will be appointed.
The “call-out” powers, which are backed by Sunak, will not feature in the financial services bill to be published on Wednesday, but could be added if he becomes prime minister.
Zahawi also noted the importance of reforms to Solvency II rules to allow UK insurers to invest more in infrastructure alongside other reforms to London’s capital markets to make it easier for companies to raise money.
On Tuesday, the Treasury published the results of a review of the fundraising market by Freshfields lawyer Mark Austin, which recommended regulatory changes to increase the ability of companies to raise funds quickly and cheaply and ensure greater investor participation retail.
In response, the Financial Conduct Authority said this was in line with its “strategic priority to ensure that UK wholesale markets continue to be regarded as one of the world’s leading markets of choice for issuers, intermediaries and investors by identifying ways to streamline further capital raising by publicly traded companies and promote access for investors’.
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