(Bloomberg) --
Bank of England Governor Andrew Bailey denied that officials allowed inflation to get out of control by acting too slowly, saying interest-rate increases a year ago would have damaged the recovery from the pandemic.
The remarks in an interview on BBC Radio on Friday respond to growing attacks on the UK central bank from the ruling Conservative Party. Inflation is at a 40-year high and forecast to climb further in coming months.
While the BOE was first among major central banks to lift rates, it's fallen behind the US Federal Reserve in the pace of increases. Bailey noted that a year ago, the UK was just emerging from lockdown and policy makers were worried about a spike in unemployment as the government wound down furlough payments.
“I would challenge anybody to have been sitting here a year, two years ago say there's going to be a war in Ukraine, and it's going to have this effect on inflation,” Bailey said on the Today program. Asked whether acting early would have risked a recession, he said, “Yes.”
BOE Chief Economist Huw Pill repeated the defense on Bloomberg Television later Friday, saying “I don't believe we're behind the curve” on raising rates to curb inflation.
Liz Truss, who is leading in the contest to replace Boris Johnson as UK prime minister, has said she wants to revisit the BOE's mandate and explore how to ensure policy makers meet their goal to keep inflation down.
Her allies have been more aggressive in faulting the BOE, which yesterday predicted the economy will slide into a recession until 2024 and that inflation will peak above 13% in October, when domestic energy bills are set to surge again.
“Interest rates should have been raised a long time ago and the Bank of England has been too slow in this regard,” Suella Braverman, the Attorney General and a supporter of Truss, said on Sky News.
Business Secretary Kwasi Kwarteng joined the attack, giving a series of interviews saying that the BOE should have acted earlier.
“The job of the Bank was to deal with inflation,” Kwarteng said on Sky News. “They've got a 2% inflation target, that's actually their mandate. And now inflation is getting double digits. So clearly, something's gone wrong.”
Bailey said politicians are welcome to debate the remit of the BOE but that they should preserve the institution's authority to set monetary policy. He also pledged to serve out his full eight-year term as Governor, no matter who takes over in Downing Street.
I don't think “there is a large desire in this country to question independence,” Bailey said. “But I'm very happy to discuss with the new government the details on the nature of the regime that's in place, how it works and how the Bank of England operates within it.”
He said that interest rates usually take two years or so to have an impact on inflation, meaning that the BOE would have had to move up borrowing costs aggressively during the pandemic to stave off the price increase being felt today.
“Given the situation we were facing in the context of Covid in the context of the labor market, the idea that at that point, we would have tightened monetary policy, I don't remember there were many people saying that at that time,” Bailey said.
Read more:
- Bailey Says BOE Concerned UK Companies Are Raising Their Prices
- BOE Raises Rates by Most Since 1995, Warns of Long Recession
- UK's Next Prime Minister Will Inherit a Brutal Economic Storm
(Updates with further comments from Bailey)
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