Andrew Bailey: Soaring inflation to hit UK economy harder than other nations

Speaking with other central bankers at a European Central Bank conference in Sintra, Portugal, Andrew Bailey said that the energy price shock that all European countries are experiencing will likely cause the UK economy to deteriorate more quickly and severely than other nations.

“Unfortunately, there is going to be a further step-up in UK inflation later this year because that is a product of the way the energy price cap interacts with the energy prices we have observed over the last few months,” he said. “I think the UK economy is probably weakening rather earlier and somewhat more than others.”

The “structural legacy” of Covid in the labour market in Britain has made the problem worse as businesses grappled with a labour shortage. 

UK inflation hits 40 year high of 9.1% in May

The governor also said that he had seen a change in the drivers of rising inflation in the latest inflation data, from high pricing of goods that were in limited supply after Covid-19, towards goods and services impacted by the invasion of Ukraine in February.

It is expected that the Bank of England will increase rates by half a percentage point at its upcoming meeting in August, a possibility that Bailey did not totally rule out on Wednesday,  adding there were “options on the table”.

“There will be circumstances in which we will have to do more. We are not there yet in terms of the next meeting. We are still a month away, but that is on the table. But you should not assume it is the only thing on the table. The key thing for us is to bring inflation back down to target and that is what we will do,” he said. 

In May, UK inflation reached a 40-decade high of 9.1%. The Bank of England stated earlier this month that it was prepared to take drastic action if necessary to combat inflation, which it anticipates will top 11% in October. Since December, the central bank has hiked interest rates five times.

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