Biggest rate increase for 30 years on horizon

Governor defends Bank of England’s independence as Conservative leadership candidates step up attacks

The Bank of England is poised to unveil the biggest increase in interest rates for almost 30 years, Governor Andrew Bailey suggested as he hit back against a barrage of attacks by Tory leadership candidates. Mr Bailey, who issued a staunch defence of the Bank’s role, said rate-setters had put a 0.5 percentage point increase “on the table” for the next meeting in August, the strongest signal yet that the Bank will step up efforts to bring inflation down from a 40-year high.

THE Bank of England is poised to unveil the biggest increase in interest rates for almost 30 years, Governor Andrew Bailey suggested as he hit back against a barrage of attacks by Tory leadership candidates.

Mr Bailey said rate-setters have put a 50 basis point increase “on the table” for the next meeting in August, the strongest signal yet that the Bank will step up efforts to bring inflation down from a 40-year high.

The Governor also launched a staunch defence of the Bank, warning its independence is “now more important than ever” following unprecedented criticism from prime ministerial hopefuls.

The Bank’s monetary policy committee has already voted for five back-toback rises after inflation hit a 40-year high of 9.1pc, taking the base rate from 0.1pc to a post-financial crisis high of 1.25pc. But Mr Bailey signalled the Bank could quicken the pace of rate rises from 25 basis points to 50 in what would be the biggest hike since 1995, before it gained independence.

A 50 basis point jump would add almost £70 to month to a the costs of a typical £250,000 mortgage.

He said at the Mansion House financial services dinner last night: “If we see signs of greater persistence of inflation, and price and wage setting would be such signs, we will have to act forcefully. In simple terms this means that a 50 basis point increase will be among the choices on the table when we next meet.”

Mr Bailey said that a bigger rate rise is “not locked in” as he admitted there are growing risks that inflation could be even higher than expected.

Markets expect interest rates to hit almost 3pc by the end of 2022, raising mortgage costs for millions of homeowners and pushing up borrowing costs for businesses.

The Governor added that sales of government bonds to reverse quantitative easing could start as soon as September and said reductions to the amount of gilts held by the Bank could hit up to £100bn in the first year.

A number of Conservative leadership challengers have attacked the Bank of England over the surge in inflation as food and energy bills soar. Some argued its bond-buying blitz under quantitative easing has fuelled inflation. Liz Truss, the Foreign Secretary, now the favourite to succeed Boris Johnson, has suggested she will look again at the Bank’s remit to ensure it is tough enough.

Mr Bailey used the speech to defend the Bank and its remit, arguing that “Russian shock is now the largest contributor to UK inflation by some way”.

He said: “These times are the largest challenge to the monetary policy regime of inflation targeting that we have seen in the quarter century since the MPC was created in 1997. That emphatically does not mean the regime has failed. Far from it. The regime was set up for times exactly like these. The regime, founded on central bank independence, is now more important than ever. The worth of any regime is tested in the difficult, not the nice, times.”

At the same Mansion House event, Nadhim Zahawi, the Chancellor, promised to seize the benefits of Brexit by revoking Eu-era rules governing the financial services, such as the controversial Solvency 2 rulebook for insurers.

Mr Zahawi also confirmed a “call-in power”, which would allow ministers to reverse decisions by financial watchdogs, was “under consideration”.

It came as the Treasury published plans to make it easier for listed companies to raise money, as part of wider reforms to boost the City. A review led by Mark Austin proposed to make it easier for companies to tap investors for cash by scrapping prospectuses for most secondary fundraisings.