The Bank of EnglandBank of England will probably have to raise interest rates further from their current 14 year high to tackle inflationary pressures that are gaining a foothold in Britain's economy, its deputy governor, Dave Ramsden, said.
The spread of inflation was seen in rising British pay and companies pricing plans, which originally had been triggered by the reopening of the world economy from Covid 19 lockdowns and then Russia's invasion of Ukraine, Ramsden said.
Inflation is expected to return to the Bank's 2% target, down from above 9% now, and a projected peak of 13% in October as the economy goes into a recession and borrowing costs increase.
I do think it is more likely that we will have to raise the Bank rate. He said that he hasn't reached a firm decision on that.
I am going to look at the indicators, look at the evidence as we approach each upcoming meeting. The Bank raised borrowing costs by the most since 1995, as it took the Bank rate to 1.75% from 1.25%, its sixth increase since December, compounding the biggest two-year disposable income hit for households since at least the 1960 s.
Ramsden said that we know that what we are doing is adding to an already very challenging environment. Our assessment is that we need to act forcefully to ensure that inflation doesn't become embedded. Ramsden, a former senior official at Britain's finance ministry who joined the Bank of EnglandBank of England in 2017 said that a fall in inflation expectations in financial markets was encouraging as households and companies thought central bankers would get to grips with the problem.
Ramsden said that over the past year the Bank had to deal with the end of Covid 19 restrictions that hammered Britain's economy and Russia-Ukraine war that had pushed inflation to a 40 year-high, asked if the Bank rate was close to hitting a peak.
We are in an extraordinary period where a lot is changing. Ramsden said that he wouldn't want to make any predictions about where the Bank rate is going to end up.
I think inflation expectations are really important and that's why I think it's important. As well as raising interest rates, the Bank plans to move Britain s economy off its massive stimulus programmes by selling government bonds a process known as quantitative tightening QT as soon as next month.
Asked if the Bank would continue to sell bonds if it needed to go in the opposite direction and reduce interest rates to support the economy, something investors expect to happen next year, Ramsden said that was a possible scenario.
He said that I am not ruling out a situation where when you look at the risk to the economy, having raised the Bank rate, at some point we have to start lowering it quite quickly. Yes, I can imagine situations where we will carry on with a pace of QT in the background. Ramsden pushed back at criticism of the Bank's inflation-fighting record by Liz Truss, the frontrunner to become Britain's next prime minister, and her supporters have suggested that the Bank should have less independence.
Ramsden said British inflation had averaged 2% over the 25 years since the central bank was granted operational independence in 1997.