Bailey defends BoE as inflation soars 

Bailey further said that the nature of the economic shock meant higher interest rates could damage the economy, at a conference in Vienna yesterday (23 May).

He said BoE could take a softer approach to rising interest rates because high energy prices would naturally dampen consumer spending.

“In the UK we are facing a very big negative impact on real incomes caused by the rise in prices of things we import, notably energy. We expect that to weigh heavily on demand. We judge the appropriate degree of monetary tightening taking that into account,” he said.

In defense of BoE’s response, he said: “What I reject is the argument that in our response to Covid the Bank’s Monetary Policy Committee let demand get out of hand and thus stoked inflation.

“The facts simply do not support this. On the latest number, UK GDP in March was only 0.6% above its pre-Covid level, and it is substantially below the path it was expected to follow pre-Covid.”

These comments are likely to be interpreted that the MPC will stop short of increasing interest rates from two percent to three percent, according to The Guardian.

Bailey continued to state that the “tight labour market” does not equate to “rapid demand growth” because the number of those seeking work has dropped.

“The labour force has shrunk by around 1% since the onset of Covid. It looks much more like an impact from the supply of labour,” he said.