Andrew Bailey today denied the Bank of England has been ‘asleep at the wheel’ on inflation as he faced a roasting from MPs.
The Governor lashed out at criticism in ‘hindsight’ as he gave evidence to the Treasury Committee on the slow response.
Threadneedle Street has been urged to admit a ‘mistake’ in holding off earlier action, having insisted for months that inflation was ‘transient’.
In tetchy exchanges, chair Mel Stride asked whether the Bank had been ‘asleep at the wheel’.
But Mr Bailey said the economists had been making ‘fine and hard judgments’ – insisting that there was no way they could have ‘foreseen’ the Ukraine war.
‘As you say, there have been a series of supply shocks and most recently with the impact of the war, Russia’s invasion of Ukraine,’ he said.
‘We can’t predict things like wars – that’s not in anybody’s power.
‘I don’t think we could have done anything differently; we could not have seen a war with Ukraine.’
Mr Bailey also painted a grim picture of the chances that the situation will improve soon, saying the prospect of more food inflation due to the Ukraine conflict is a ‘major worry’.
There have been claims of Cabinet unrest about the performance of the Bank, which has now raised interest rates to 1 per cent and is predicting headline CPI inflation will top 10 per cent this year.
Some have even suggested a rethink of its independent status, as Britons are hammered by rampant price rises and Rishi Sunak comes under huge pressure to offer a bigger bailout.
Andrew Bailey is giving evidence to the Treasury Committee later as senior Tories voice frustration about his response to spiking prices
In tetchy exchanges, chair Mel Stride asked whether the Bank had been ‘asleep at the wheel’
The Bank has now raised interest rates to 1 per cent and is predicting headline CPI inflation will top 10 per cent this year
At the hearing this afternoon, Mr Bailey said the potential for further food inflation is a ‘major worry’ for the central bank.
‘Ukraine and Russia is the big risk in a way,’ he said. ‘One is the risk of a further energy price shock, which would come from the cutting off of gas and distillates, such as products like diesel.
‘And then, the one which I might sound rather apocalyptic about, is food.
‘Two things the finance minister said is that there is food in store but they can’t get it out.
‘While he was optimistic about crop planting, as a major supplier of wheat and cooking oil, he said we have no way of shipping it out and that is getting worse.
‘It is a major worry for this country and a major worry for the developing world.’
Mr Bailey shrugged off criticism from politicians, saying it was ‘not a world that I particularly respond to at all’.
He said he was ‘always’ concerned about ensuring the Bank’s independence.
‘This is the biggest test of the monetary policy framework that we have had in 25 years, no question about that,’ he said.
‘What I would say to these people is that this is when both the independence of the bank and the target framework and the nominal anchor matter more than ever, frankly. More than in the good times, the easy times as it were.’
Earlier, Mr Stride was asked on BBC Radio 4’s Today Programme if the Bank of England had failed on inflation.
The Tory MP stressed that the UK was not ‘unique’, pointing to the shock of the Ukraine war.
‘Undoubtedly if you look at the headline figures having a target of 2 per cent and moving up to beyond 10 per cent this autumn as is forecast is not a good look,’ he said.
‘It’s fair to say we are not unique in that position – there are a number of countries around the world, US and Spain and Eurozone have worst inflation than we do at the moment.
‘The area where you can really criticise the Bank..is around what’s happening in the labour market which has become very overheated and I think we are now in the foothills of a wage-price spiral with wage chasing higher prices leading to higher wages in turn.’
Business Secretary Kwasi Kwarteng admitted yesterday that the Bank missing its two per cent inflation target was ‘clearly’ an issue.
However, he argued that Mr Bailey was ‘doing a good job in difficult times’.
‘It is a matter of fact that when the Bank of England became independent in 1997 they had an inflation target of two per cent,’ Mr Kwarteng told Sky News’ Sophy Ridge on Sunday show.
‘And inflation is running almost into double digits now, so that is an issue clearly.
‘But I think Andrew Bailey is doing a good job in difficult times.
‘These are completely unprecedented times, we’ve had the Covid pandemic, we’ve had a huge spike in economic activity after the lockdown restrictions were eased.
‘And then, of course, you’ve got this war in Europe for the first time in 70 years with tanks rolling into European territory.
‘So all of these things mean it’s a very difficult time and I think he’s doing a reasonable job.’
One Cabinet minister was quoted by the Sunday Telegraph as saying government figures were ‘now questioning its independence’.
They said the Bank’s handling of inflation raised ‘fundamental questions’ about the Bank’s ‘preparedness and how match fit some of these institutions are’.
Mr Sunak was also put under pressure to take greater steps to hold the Bank to account.
Lord Forsyth, a former Cabinet minister and the chairman of the House of Lords’ economic affairs committee, said: ‘The first thing the Bank needs to do is acknowledge they made a mistake and say what they are going to do about it.
‘One has the impression they are rather ostrich-like.’
Mel Stride, who chairs the Treasury Select Committee, said the Bank’s changing inflation forecasts was not a ‘good look’. Separately, Rishi Sunak has said a windfall tax for energy firms is ‘on the table’
Mr Stride also said ‘there is a case’ for a windfall tax on energy giants to help families deal with the cost-of-living crisis.
Mr Kwarteng poured cold water on the idea yesterday, even though Rishi Sunak has said it is ‘on the table’.
Mr Stride said: ‘I think you have to take a balanced view of all these things, Kwasi’s absolutely right that, in principle, putting up taxes unannounced, effectively, retrospectively, just puts a large sign up that says, ‘it’s not a good place to invest’, and we don’t want to do that.
‘At the same time, we are in extraordinary circumstances, the supernormal profits that these companies have made are vast, and I personally think there is a case now for looking at a one-off windfall tax and channelling that money in towards those who are really struggling and are bearing the brunt of these cost-of-living challenges.’