Bank of England chief says recession still ‘likely’ – but welcomes ‘clarity’ on energy bills

‘It’s important that there is clear way forward on policy’, says governor Andrew Bailey on Liz Truss plan

The governor of the Bank of England has said he welcomed the prospect of a “clear way forward” to tackle soaring energy bills from Liz Truss.

The expected announcement from the new prime minister on energy bills would reassure markets, said Andrew Bailey – but warned that recession remained the “most likely outcome” for the UK economy.

Ms Truss is working to finalise a multi-billion-pound package to freeze household and businesses’ gas and electricity bills, with some estimates that it could cost over £100bn.

A government source confirmed that the plan is to freeze annual energy bills around the £2,500 mark. It is based on the current £1,971 cap – plus the £400 universal handout announced under Boris Johnson’s government.

“I do very much welcome the fact that there will be … announcements this week because I think that will help to, in a sense, frame policy and that’s important,” Mr Bailey told MPs on the Treasury select committee.

The governor added: “It’s important that there is a clear way forward on policy … That will be important for markets to understand what is going to happen.”

Mr Bailey would not be drawn on whether an energy price cap freeze could help control inflation. “It’s not for us to comment on what fiscal policy will be,” he said.

Asked if a recession remained likely, the Bank of England chief told MPs: “The recession – I hope it doesn’t happen – but obviously we have forecast it because we think it is sadly the most likely outcome.”

Under pressure to explain how the Bank and its Monetary Policy Committee would tackle current inflation of 10.1 per cent, Mr Bailey said Russian president Vladimir Putin was to blame for the energy crisis.

“It is overwhelmingly caused by Russia and the impact on energy prices,” he said. “The person [who is] going to put the UK in recession is Vladimir Putin, not the MPC [Monetary Policy Committee].”

Mr Bailey diplomatically avoided answering questions on what impact Ms Truss’s campaign promises of tax cuts would have on the economy. He said the Bank would take the PM’s energy plan announcement “into account” when deciding on interest rates next week.

The governor also offered a fierce defence of the Bank’s independence – questioned during the Tory leadership contest this summer.

Asked if the Bank’s remit to set interest rates to meet inflation targets was “outdated”, Mr Bailey said: “The inflation target … has proved to be very successful”.

He added: “This is by the far the biggest shock we’re facing during the life of that [independence], but it does not suggest that the regime has failed. What it suggests is that the regime has to do its work and respond to a much bigger shock. And I’m confident it will do so.”

Asked about Goldman Sachs forecast of 22 per cent inflation, the Bank of England’s chief economist Huw Pill said it was “plausible” – though he did not endorse the estimate.

The newly-appointed chancellor Kwasi Kwarteng reiterated on Wednesday his full support for the independence of the Bank of England. Last month he said that ministers “need to look again at what the mandate is”.

Ahead of talks with Mr Bailey on Wednesday, Mr Kwarteng said the new administration’s plans would involve “higher borrowing in the short term whilst ensuring monetary stability and fiscal discipline over the medium term”.