Green drive could mean ‘more permanent’ increase in energy bills

‘Inflation is clearly something that bites on people’s household income. I am sorry that is happening’

HOUSEHOLDS face permanently higher energy prices owing to the shift away from fossil fuels, Andrew Bailey has said, as he warned that the current spike in costs is being partly driven by a global switch away from coal.

The Governor of the Bank of England told BBC’S Today programme that the green energy drive could leave households with a “more permanent” rise in bills as Britain moves towards a net zero economy by 2050.

He said: “In the transition, which is obviously going to be a quite long-run transition, it is reasonable and necessary to think we might transition from what I might call more polluting hydrocarbons – coal – through greater use of less polluting hydrocarbons and eventually, let’s hope, we emerge in a much more complete renewable economy.

“It is possible some of what we’re seeing with gas prices at the moment is already climate change starting to have an effect if there is a switch out of coal, which a lot of people want to see.

“It is possible that part of the story, but only a part of it, would be a [permanent] higher level of prices. Not higher inflation, but a level change in prices.”

The Bank is predicting two years of falling real incomes for households as the Consumer Prices Index heads to a decade high of 5 per cent next spring and gas bills rise by as much as 35 per cent next April.

The price pressure caused the Bank to warn of a 1.25 per cent hit to household incomes this year after inflation with another 0.75 per cent drop in 2023.

Mr Bailey said: “Inflation is clearly something that bites on people’s household income, they will feel that in terms of the prices that are already going up and I am very sorry that is happening.

“We want to see the causes of inflation, which are to a considerable degree global, and supply issues tackled [so] we can go back to the world where inflation is stable and back to the target.”

The Governor faced criticism for the Bank’s decision to hold interest rates at 0.1 per cent yesterday after heavy hints of a rise, prompting some analysts to label him an “unreliable boyfriend” akin to his predecessor, Mark Carney.

But Mr Bailey denied the claims and said he was waiting for the “missing piece of evidence” on the impact of the end of the furlough on the jobs market.

The Governor stressed rates would go up and said: “Let me assure you, we won’t bottle it.”

Asked whether interest rates will rise as high as 1 per cent, Mr Bailey said lower rates would be more likely than a return to pre-financial crisis levels of 4 per cent or 5 per cent.

He added: “We do think interest rates will need to rise but we don’t put a number on it... I’m not going to endorse 1 per cent. I think it’s correct to think in those terms because what it means is the world of low interest rates we’ve been in since the financial crisis... we’re not going back there.”

The Governor added that the current high prices were outside of the Bank’s control. He said: “Raising interest rates won’t produce more gas, it won’t produce more semiconductor chips.”