Interest rates may need to rise again, warns Bank of England boss – but ‘nothing decided’

Britons ‘should not have to worry about inflation in this way’, says Andrew Bailey

Interest rates may need to rise further to keep inflation in check but “nothing is decided” yet, Bank of England boss Andrew Bailey said on Wednesday following a raft of negative housing data.

Inflation “remains much too high” and is putting families and businesses under real strain, the Bank governor said in a speech at a cost of living conference.

Economic activity has been a little stronger but wages are also rising firmly, he said, and while inflation is forecast to fall sharply over the year ahead, the Bank is watching carefully to ensure price rises do not become entrenched.

It came as figures showed the number of mortgages being approved to home buyers fell for the fifth month in a row in January, while Nationwide said house prices fell by 1.1 per cent year-on-year in February, marking the first annual decline since the first Covid lockdown.

Around 39,600 mortgages were approved for house purchase in January, down from 40,500 in December and the lowest monthly total since May 2020, the Bank of England said.

Robert Gardner, Nationwide’s chief economist, said the housing market remains subdued following turbulence sparked by the Truss-Kwarteng mini-budget last September.

“Annual house price growth slipped into negative territory for the first time since June 2020, with prices down 1.1 per cent in February compared with the same month last year,” he said. “Moreover, February saw a further monthly price fall – the sixth in a row – which leaves prices 3.7 per cent below their August peak – after taking account of seasonal effects.”

Inflation has dropped to 10.1 per cent from a peak of 11.1 per cent last October thanks to sharply lower wholesale energy prices.

Energy prices are expected to fall further in 2023 and Ofgem’s price cap will eventually fall below the government’s energy price guarantee – set at £3,000 from April – but the outlook for 2024 is “more uncertain”, Mr Bailey.

He said: “Some further increase in bank rate may turn out to be appropriate, but nothing is decided.

“The incoming data will add to the overall picture of the economy and the outlook for inflation, and that will inform our policy decisions. At this stage, I would caution against suggesting either that we are done with increasing the bank rate, or that we will inevitably need to do more.”

He added: “If we do too little with interest rates now, we will only have to do more later on. The experience of the 1970s taught us that important lesson.

“But equally – second – we have to monitor carefully how the tightening we have already done is working its way through the economy to the prices faced by consumers.”

He told the conference that the Bank’s move to increase rates from 0.1 per cent in December 2021 to 4 per cent currently cannot immediately ease “unprecedented” rises in food prices or the energy bill shock that many families have faced over the past year since Russia’s invasion of Ukraine.

“People should not have to worry about inflation in this way,” he said.

“I am afraid monetary policy cannot make the shock to our national real income go away. But what monetary policy can – and must – do is to make sure that the inflation that has come to us from abroad does not become lasting inflation generated at home.

“Homemade inflation will not make us any better off as a country. Those with weak bargaining power will fall further behind.”

He added: “Energy bills will start to drag directly on overall annual consumer price inflation. But as you can see, this does not mean that we should expect household energy bills to come down to previous levels any time soon.

“And from a cost of living perspective, it is the level of what people have to pay that matters. There will be some relief, but energy bills will remain a challenge for many people, particularly for those on lower incomes.”

Separately, new figures showed that Scotland avoided entering recession at the end of 2022, with 0.1 per cent growth in the final three months of the year.

GDP was down by 0.6 per cent in December, and remains 0.3 oer cent below pre-pandemic levels recorded in the final three months of 2019.