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Bank of England will do ‘whatever is necessary’ to tackle spiralling inflation

The Bank of England will do ‘whatever is necessary’ to prevent inflation becoming a embedded in the British economy, its second in command said today, as it eyes up a record-breaking hike in interest rates. 

Deputy Governor Sir Jon Cunliffe told the BBC Radio 4’s Today programme that the Bank was prepared to take action after inflation reached 40-year highs of 9.1 per cent in May – with forecasters expecting it to breach 11 per cent by October. 

And the Bank’s top economist, Huw Pill, said separately in a speech that interest rates may need to rise at a quicker pace to rein in ‘uncomfortably high’ inflation.

It points to the possibility that the Bank may lift rates by a half point to 1.75 per cent in August, up from the current 1.25 per cent, in what would mark the biggest single rise ever made by the Bank since it gained independence in 1997.

The Bank has increased rates at five meetings in a row to tackle the recent jump in inflation as the cost of living crisis tightens Britons’ purse strings.

But so far each rise has been by a quarter point, with the Bank taking a gradual approach as it balances the risk of choking off economic growth.

The Bank of England’s Deputy Governor Sir Jon Cunliffe (pictured) told the BBC Radio 4’s Today programme that the Bank was prepared to take action after inflation reached 40-year highs of 9.1 per cent in May – with forecasters expecting it to breach 11 per cent by October.

Interest rate-setters have signalled that bigger hikes may be on the cards as the Bank of England looks to do "whatever is necessary" to stop rocketing inflation from becoming long-term.

Interest rate-setters have signalled that bigger hikes may be on the cards as the Bank of England looks to do ‘whatever is necessary’ to stop rocketing inflation from becoming long-term.

Sir Jon said the Bank faces a difficult balancing act, adding: ‘We will do whatever is necessary to ensure that as this period of inflation goes through the economy, it does not leave us with a persistent domestically generated inflation problem.

‘We will act to make sure that doesn’t happen.’

But he said: ‘What we expect is that the cost-of-living squeeze will actually hit people’s spending and that will start to cool the economy.

‘We can see signs that the economy is already slowing.’ 

It comes after the Bank said in June that it would ‘act forcefully’ to tackle the threat of long-term high inflation.

Mr Pill – who succeeded Andy Haldane in the role last September – told a central banking conference hosted by King’s Business School that this pledge ‘reflects both my willingness to adopt a faster pace of tightening than implemented thus far in this tightening cycle, while simultaneously emphasising the conditionality of any such change in pace on the flow of new data and analysis’.

He stressed that ‘much remains to be resolved before we vote on our August policy decision’.

‘How I vote on that occasion will be determined by the data that we see and my interpretation of it,’ he said.

Fears are mounting that a recession – as defined by two quarters in a row of falling output – may be on the way as the cost crunch hits consumer spending.

Economists expect the economy to contract in the second quarter and there are concerns output may plunge at the year-end when soaring energy prices see the price cap lifted again in October.

The Bank has already warned that inflation is set to rise past 11 per cent in October.

But Mr Pill echoed Sir Jon’s worries over the threat to growth, adding: ‘The MPC (Monetary Policy Committee) has to navigate a ‘narrow path’ in managing these risks.’

It comes after the BoE warned today that the outlook for the economy has ‘deteriorated materially’. 

In a gloomy update, the Bank said households were facing a serious squeeze on their finances – and warned of a wave of company collapses.

As families struggle to afford the rising cost of essentials, the Bank also warned that the boom in property prices could be coming to an end.

Danni Hewson, a financial analyst at investment platform AJ Bell, said: ‘There’s a long, cold winter waiting in the wings.’

In its latest Financial Stability Report, the Bank said: ‘The economic outlook for the UK and globally has deteriorated materially. 

‘Following Russia’s illegal invasion of Ukraine, global inflationary pressures have intensified sharply.’ 

Energy prices have shot up as Western countries have shunned Russian oil and gas exports. And food prices are also spiralling higher, as Russia and Ukraine are major exporters of essentials such as wheat and sunflower seeds used in cooking oil.

There’s a long, cold winter waiting in the wings and one which can’t be hidden under bushels of tinsel and pretty lights

There’s a long, cold winter waiting in the wings and one which can’t be hidden under bushels of tinsel and pretty lights

Now central banks around the world have been forced to hike interest rates in an attempt to encourage households and businesses to save rather than spend, in the hope this will bring prices down.

But it is also damaging the recovery from Covid, and several economists are now predicting the UK will plunge into a recession over the coming months.

The Bank of England said that there were a number of risks ahead, including developments in the Russia-Ukraine conflict, which could ‘adversely affect UK financial stability’.

So far, household debt in general relative to income has remained broadly flat.

But the Bank thinks the worst is yet to come. It added: ‘The rise in living costs and interest rates will put increased pressure on UK household finances in coming months.’

Mortgage holders on fixed-rate deals, who are currently protected from rising interest rates, could face a shock when they next come to refinance.

And businesses which borrowed during the pandemic when lockdowns shuttered their stores are now having to repay those loans – at a time when costs are soaring, and interest rates are rising.

Energy prices have been pushed up by Russia’s invasion of Ukraine, and more recently by strikes in Norway.

This is proving difficult not only for households – who are set to be slapped with another hike to their bills when energy regulator Ofgem next reviews the price cap in October – but also for businesses.

Almost a third of small and medium-sized firms don’t have enough cash to last them a week, according to the Bank’s report.

But those smaller businesses account for around half of UK employment – jobs which could be lost if the firms struggle to keep their head above water.

Mrs Hewson said: ‘Right now, the long, light days and warm temperatures are not only keeping energy costs down, they’re helping propel at least some additional footfall out onto high streets.

‘But there’s a long, cold winter waiting in the wings and one which can’t be hidden under bushels of tinsel and pretty lights, especially as tills are expected to run lighter.’ 

The Bank said the pressures of rising costs and higher interest rates ‘are likely to lead to some business failures’.

But high street lenders were well-prepared to weather an economic storm, the Bank added, as it encouraged them to keep lending to businesses and households where possible to keep the economy afloat.

Officials on Threadneedle Street even pushed ahead with plans to raise banks’ cash buffers, designed to be built up in good times in order to give lenders some leeway when a crisis hits.

The buffer requirement, which was slashed to zero during the pandemic to encourage banks to lend, will now be bumped up to 2 per cent of a bank’s assets.

But this is also a sign that the Bank of England is bolstering the UK’s defences in preparation for an economic storm.

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