UK interest rate rise in 2022 becoming more likely, says Bank chief

Andrew Bailey says inflationary pressures strengthen the case but ‘we are monitoring situation closely’

The inflationary pressures building in the UK has made a rise in interest rates next year more likely, the central bank chief has warned.

Against a backdrop of rising fuel prices and the prospect of higher transport costs pushing up the price of food in the run-up to Christmas, the Bank of England’s governor said there were signs that inflation could be sustained and the central bank’s monetary policy committee (MPC) may need to increase borrowing costs in 2022.

With inflation at 3.2% and heading above 4%, he said inflationary pressures appeared to be worsening rather than improving, although a slowdown in the economy’s growth rate over recent months meant the MPC would be reluctant to do anything that choked off the recovery.

Speaking to the Society of Professional Economists in London, Andrew Bailey said: “Recent evidence appears to have strengthened that case [for an increase in interest rates] but there remain substantial uncertainties and we are monitoring the situation closely.”

Last week the MPC voted to keep interest rates at 0.1% and its £875bn stimulus programme in place after concerns that a rebound in economic growth since the early part of the year was beginning to peter out.

The committee said it was concerned that there were more people on the government’s furlough scheme than the Bank predicted in its August health check on the economy, fuelling concerns that unemployment would increase when the scheme ends this week.

Playing down the prospects for a return to previously high levels of growth, Bailey said the economy remained on a journey to a post-Covid situation and policymakers would need to put in the “hard yards” to navigate a route to safety.

“I, and other MPC members, have used the analogy of a bridge to describe the role of economic policy in the age of Covid, the bridge to the other side of Covid. We are still on that bridge,” he said.

“The rate of recovery has slowed over recent months, and that slowing is continuing. Relative to the fourth quarter of 2019, on the latest data to July, the level of GDP was 3.5% lower.

“That’s around one percentage point below the level consistent with the August monetary policy report. It is inevitable in a bounceback that the growth rate will slow as the recovery nears its end point. It is not, though, inevitable – or desirable – that the previous level is not regained.”

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

Samuel Tombs, the chief economist at the consultancy Pantheon Macroeconomics, said Bailey’s downbeat comments about the economy could be set against his worries about inflation to leave the path of interest rates open.

“Our sense from the speech is that Mr Bailey leans slightly dovishly and is not going to rush to hike [interest rates], unless the case is overwhelmingly strong,” he said.

“But given that the amount of slack in the labour market will be much more apparent in December, when the impact of the wind down of the furlough scheme at the end of this month will be visible in the official data, Mr Bailey is hedging his bets and not providing any hostages to fortune.”

• This article was amended on 6 October 2021. An earlier version said the MPC had voted to keep interest rates “at 0.25%”; as the linked page indicated, that should have said 0.1%.


Phillip Inman

The GuardianTramp

Related Content

Article image
Bank of England interest rate decision still on a knife-edge despite rise in inflation
Analysis: an increase would do nothing to alter the course of rising prices

Phillip Inman

17, Nov, 2021 @9:56 AM

Article image
Bank of England must be wary of interest rate rise, says chief economist
Andy Haldane says UK at risk of sharp slowdown as BoE weighs up conflicting forces of inflation from weak pound and the Brexit vote denting confidence

Katie Allen

02, Dec, 2016 @2:37 PM

Article image
Interest rates dilemma puts spotlight on Bank of England’s credibility
As markets bet on an increase, economists give their view after Andrew Bailey’s mixed messages

Richard Partington Economics correspondent

19, Oct, 2021 @5:00 AM

Article image
Bank of England rift as chief economist ponders interest rate rise
Andy Haldane reveals he seriously considered opposing governor Mark Carney in MPC vote earlier this month

Larry Elliott Economics editor

21, Jun, 2017 @11:09 AM

Article image
Bank official warns of early interest rate rise as Kraft Heinz puts up prices
Baked beans maker is latest firm to talk of food price rises, as inflationary pressures mount

Angela Monaghan and agencies

10, Oct, 2021 @3:39 PM

Article image
Bank of England governor ‘very uneasy’ about rising inflation
Prospect of pre-Christmas interest rates rise looms larger after Andrew Bailey comments

Larry Elliott Economics editor

15, Nov, 2021 @6:28 PM

Article image
UK inflation could top 5% by early 2022, says Bank’s new chief economist
MPC ‘finely balanced’ over whether to raise interest rates in November, adds Huw Pill

Mark Sweney

22, Oct, 2021 @8:37 AM

Article image
Bank of England raises interest rates to 0.25%
Inflation spike prompts MPC to vote for increase despite fears for UK economy from surge in Omicron cases

Richard Partington Economics correspondent

16, Dec, 2021 @12:02 PM

Article image
Interest rate cut more likely due to Brexit uncertainty, says Bank
Bank of England leaves rates on hold but signals that could change in near future

Phillip Inman

19, Sep, 2019 @12:55 PM

Article image
Why is the Bank of England considering an interest rate rise?
Rising inflation and winding down of Covid likely to weigh on central bank’s decision makers

Phillip Inman

04, Nov, 2021 @6:00 AM