Bank of England Governor Andrew Bailey has acknowledged for the first time that the BoE is grappling with the UK’s wage-price spiral as he vowed to raise interest rates as far as necessary to get inflation back to the bank’s 2% target.
Speaking to the British Chambers of Commerce annual conference in London on Wednesday, the BoE governor said that "some of the strength in core inflation [in the UK] reflects the indirect effects of higher energy prices."
"But it also reflects second-round effects as the external shocks we have seen interact with the state of the domestic economy. As headline inflation falls, these second-round effects are unlikely to go away as quickly as they appeared," Bailey pointed out. According to him, these areas of persistence include domestic wage growth and price setting.
He admitted that "the outlook for inflation further out is more uncertain and depends on the extent of persistence in wage and price setting." Bailey pledged that "the [BoE’s Monetary Policy] Committee (MPC) will continue to monitor closely the indicators of persistence in inflationary pressures."
"I can assure you that the MPC will adjust Bank Rate as necessary to return inflation to target sustainably in the medium term, in line with its remit," the BoE governor said.
A UK newspaper recalled in this vein that over the past 18 months, the BoE has repeatedly said that it is trying to stop the risk of high energy and food costs affecting domestic wages and prices. According to the media outlet, by making Wednesday's remarks, the bank governor "has now admitted" that the BoE has "failed in that task."
Bailey spoke after UK inflation remained in double digits in April, with annual price rises of 10.1 percent, which raised the chances of further interest rate hikes from the BoE, a measure the bank traditionally takes to respond to the issue. The annual rate of inflation in Britain reached 11.1% in October 2022, a 41-year high, before dropping in subsequent months.
Apart from soaring inflation, the COVID-19 pandemic and the West's sanctions slapped on Russia over its special military operation in Ukraine were regarded as among the major factors behind the worsening economic conditions in the UK.
London was one of the strongest supporters of the anti-Russian sanctions, opposing a peaceful resolution to the Ukraine crisis, but as a result, Britons found themselves among those who have been hit hardest by the global economic turmoil.