Inflation to hit 11pc, says Bank of England
Sunak indicates tax cuts will be put on hold until price rises are brought under control
INFLATION will climb to 11 per cent this year, the Bank of England has predicted, prompting the Chancellor to indicate that he will not cut personal taxes until spiralling prices are brought under control.
Yesterday the Bank’s Monetary Policy Committee, led by Andrew Bailey, the Governor, increased interest rates by a quarter of a percentage point to 1.25 per cent – the fifth rise in a row.
It was also forced to lift its peak inflation prediction for October, when the energy price cap will be increased, from 10 per cent.
It marks the eighth time in a year the Bank has revised the forecast and means it will overshoot its 2 per cent target by the biggest margin on record.
It prompted Rishi Sunak to assure Mr Bailey that he would not introduce tax cuts that would “add unnecessarily to inflation”. The Chancellor told the Governor: “Fiscal policy must be responsible and not exacerbate existing inflationary pressures.
“This is why, in responding to urgent cost of living pressures that people are facing, I announced a series of measures which are timely, targeted and temporary to help households manage the squeeze on real incomes whilst not adding unnecessarily to inflation.”
In a television interview last night, Michael Gove, the Levelling Up Secretary, also refused to rule out a delay of two years to any new tax cuts.
Earlier in the day he said: “When you are squeezing inflation out of the system, you will rely on the Bank of England and the Government having the fiscal and the monetary policies, which will inevitably mean we cannot do all the things that we would in ideal circumstances like to do in order to support people through a difficult period.”
Mr Sunak and Mr Gove’s comments underlined a recent claim from Boris Johnson that taxes cannot be cut until inflation is under control.
The Bank said it expected the Consumer Prices Index, the official measure of inflation, to be “a little above the 2 per cent target in two years’ time, reflecting the waning influence of external factors, and to be well below the target in three years, mainly reflecting weaker domestic pressures”.
Mr Sunak’s most recent package of support for families facing higher energy bills will add another 0.1 of a percentage point to inflation, the Bank said. The last time inflation reached 11 per cent, in January 1982, the Bank’s base rate was 14 per cent.
But after yesterday’s 0.25 percentage-point rise, the cost of borrowing was only 1.25 per cent.
Mr Bailey and his colleagues tried to walk a line between the need to curb price rises and the risk of tipping the country into a deep recession.
Official data suggest the UK is teetering on the brink and it is forecast to have no economic growth next year.
Writing to the Chancellor to explain why he had missed his inflation target, Mr Bailey blamed companies for increasing wages and prices, as well as global factors including the war in Ukraine and Covid lockdowns in China.
He said: “This succession of global shocks has contributed to inflationary pressures in the UK being more persistent than expected. Rates of consumer price inflation in the euro area and the United States have also been elevated during the first half of this year.”
Mr Bailey said developments in the UK economy had contributed to the problem, “including the tight labour market and the pricing strategies of firms”, and admitted that real incomes and profits would fall further regardless of interest rate adjustments.
In an interview with ITV last night, Mr Sunak said: “I want people to know the Government is on their side during what we know is a challenging time. “We are helping where we can. “I don’t have a magic wand – I can’t make the global challenges of inflation and the impact of a war in Ukraine disappear, but we can try and ease some of that burden.”
The small increase in interest rates announced by the Bank of England yesterday will do little to quell fears that it is failing to act decisively enough to tame rampant inflation. The Bank’s counterpart in the United States, the Federal Reserve, had the evening before put up its benchmark rate by 0.75 percentage points. To the dismay of many financial analysts, the UK’S Monetary Policy Committee felt capable only of a tentative
0.25 point rise, even though inflation is now expected to surpass 11 per cent in the autumn.
Obviously, higher interest rates will be painful for some households and businesses, particularly if they are overly indebted. There are also fears about the already contracting economy tipping into a recession. Moreover, more normal monetary policy is bound to come as a shock to the younger generations. They have only ever known the “emergency” ultra-low interest rates and quantitative easing that have characterised the post-financial crisis era, and have no memory of the difficult experiences of their parents and grandparents in the 1990s and earlier.
None the less, rate-setting is the central tool in central banks’ arsenals to cool the inflationary fires, and the Bank of England’s responsibility is to limit price rises to around 2 per cent. We are considerably above that already. The Bank’s critics argue that it is destroying its credibility by acting more like an arm of the Treasury than as the independent body it purports to be.
What is missing in the UK is any sort of political debate about the performance of the Bank of England and what some consider to be its fundamental lack of accountability. If it has indeed fallen victim to a form of economic groupthink – too believing in the power of its own financial modelling and the brilliance of its technocratic expertise – then the country’s elected representatives have a responsibility to do something about that.
It is not good enough for them to mouth platitudes about the importance of maintaining central bank independence. If the Bank’s decision-making ends up compounding an economic crisis that is already causing such widespread misery, it is unlikely to be the rate-setters of Threadneedle Street who will get the blame.