Energy costs threaten to lift inflation, but the Bank awaits “meaningful data” ahead of its late-April meeting
Bank of England governor Andrew Bailey (pictured top) has warned that the global economy is facing a “very big energy shock” that is likely to raise prices, while indicating that the central bank will not be hurried into decisions on UK interest rates.
Speaking to the BBC from the International Monetary Fund’s spring meetings in Washington, the Bank’s governor said that higher oil and gas costs would feed into inflation, but that policymakers faced competing pressures that made the outlook uncertain ahead of the Monetary Policy Committee’s next meeting on 30 April.
The IMF said on Wednesday that central banks should avoid moving too quickly to lift borrowing costs in response to the Middle East conflict. Bailey said the UK central bank was weighing the Fund’s “serious advice” as it assessed how the shock would affect the UK economy.
Until recently, markets had largely expected UK rates to fall over the year. That view has been challenged by the risk of renewed inflation as energy prices rise, leading to debate over whether rates will be kept on hold for longer, or possibly increased.
Central banks tend to raise rates when inflation runs hot, to curb demand, and reduce them when growth weakens, to support borrowing and spending. The present risk, Bailey suggested, is that elevated energy costs could push prices higher while also weighing on activity, complicating the policy response.
“There’s really difficult judgments to be made,” the Bank of England governor said. “We’re not going to rush to judgments on those things, because there are a lot of uncertainties around this, not just how it’s going to play out, but also how it’s going to pass through into the UK economy.”
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Bank of England Governor Andrew Bailey tells BBC News at Ten at the IMF Meeting that the world is facing a “very big energy shock” but that “it won’t rush to judgement” on rate rises… talk of four this year “seriously” “way ahead of yourself”… MORE soon pic.twitter.com/ze5miG6Hb7
Bailey said there had been indications before the conflict that the labour market was easing and that firms were finding it harder to pass price rises on to customers, factors that could limit the persistence of inflation. However, he said the Bank was still waiting for “meaningful data” showing how the conflict was affecting UK prices and growth.
He added that Britain’s reliance on gas meant the impact could be significant, but that the outcome would depend on how long the conflict lasted.
Bailey said there was “a certain amount of resilience in the system” but warned it could be tested if disruption persisted. He argued that the pace of any resolution affecting energy flows from the Gulf would be central to limiting the economic damage.
“The faster there is a resolution to this situation - I particularly mean in terms of the supply of energy coming out of the Gulf - the easier and better the outcome will be,” Bailey stated. “And that’s really critical at this moment.”
Earlier this week, the IMF has warned that the US-Israel war with Iran could tip the global economy into recession, and that the UK could be among the worst affected advanced economies.
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