The prospect of a pre-Christmas increase in interest rates has loomed larger after the Bank of England governor told MPs he was troubled by the UK’s rising inflation rate.
Giving evidence to the Commons Treasury select committee, Andrew Bailey said he was “very uneasy” about the rising cost of living and had come close to voting for an increase in borrowing costs when Threadneedle Street last met to decide on interest rates earlier this month.
The governor sided with the majority when the Bank’s monetary policy committee (MPC) voted 7-2 to keep rates on hold at 0.1%, but made it clear he could change his mind at the next meeting in December.
“All meetings are in play,” he said, referring to the possibility that the Bank could start to tighten policy for the first time since the start of the Covid-19 pandemic. “We are in the price stability business.”
The Bank currently expects inflation to peak at 5% next spring, well above the 2% target set by the government for the Bank to achieve, but Bailey said he had held back from voting for a rise in borrowing costs this month because he wanted more evidence on the post-furlough jobs market.
“I’m very uneasy about the inflation situation,” he said. “I want to be very clear on that. It is not, of course, where we wanted to be, to have inflation above target. On the decision itself, however, it was a very close call in my view,” Bailey added.
The governor said anecdotal evidence suggested the closure of the furlough scheme at the end of September had not led to a significant rise in unemployment. There will be two more official job market updates from the Office for National Statistics before the MPC’s next meeting, with the first on Tuesday.
Financial markets were taken unawares by the MPC’s November decision to leave rates unchanged, which followed comments from Bailey widely seen as suggesting an increase was imminent.
Bailey said neither he nor any other Bank policymaker had ever promised a November rate rise but added that he wanted to make clear the MPC took the need to hit the inflation target seriously.
“I thought it was critical that we put our foot down at that point,” he said in comments likely to reinforce current City sentiment that borrowing costs will increase on 16 December.
Michael Saunders, one of the two MPC members who voted for a November increase, said delaying action might lead to interest rates rising faster and further in the future, but said talk of a return to a 1970s-style inflationary wage-price spiral was misplaced.