Bailey defends Bank’s bumper rate hike

Andrew Bailey yesterday defended the Bank of England’s ‘really quite strong move’ to tame inflation with a bumper interest rate hike – and hinted that it may be some time before borrowers see any relief from high rates.

The Bank Governor, speaking at a conference in Portugal, also said officials were watching ‘very carefully’ for signs that the UK economy could be tipped into recession.

It comes after an unexpectedly steep half-percentage point hike in interest rates to 5 per cent last week, a day after official figures showing inflation at a stubbornly-high 8.7 per cent.

Some experts think the Bank is trying to engineer a recession to halt spiralling prices, something Bailey has denied.

Financial markets are betting that the Bank of England’s rate will hit 6.25 per cent over coming months.

Higher interest rates are already playing havoc with the mortgage market.

Rates on two-year fixed deals are now above 6 per cent on average and five-year deals are also climbing close to that level.

Bailey told the European Central Bank forum on central banking, in Sintra: ‘I can understand why there are critics of us and central banks…[but] we have a job to do. I’m very clear that our job is to return inflation to target and we will do what is necessary.

‘I understand the concerns that go with that but… it is a worse outcome if we don’t get inflation back to [the 2 per cent] target.’

The latest figures have been worse than the Bank feared.

Economists are particularly worried about the fact that a measure of ‘core’ inflation – stripping out volatile factors such as food and energy costs – is heading the wrong direction and climbed to 7.1 per cent, according to the latest figures.

‘The cumulative data, both particularly on the labour market and on the inflation release we had, which to us showed clear signs of persistence, caused us to conclude that we had to make really quite a strong move,’ Bailey said.

He also seemed to hint that the Bank’s interest rates could remain high for longer than expected.

‘I’ve always been interested that the market thinks that the peak will be quite short-lived in a world where we’re dealing with more persistent inflation,’ he said.

When asked whether the market was right to predict higher rates, Bailey responded; ‘We’ll see.’

But the Governor said that the UK economy had held up better than expected despite the spate of rate hikes and global economic turmoil.

Asked about recession risks, he said: ‘We’re not currently forecasting it, but obviously we have to watch it very carefully.’