(Bloomberg) --
Bank of England Governor Andrew Bailey said the U.K. economy is already slowing because of a squeeze on consumer spending power, and that will help reduce inflation next year.
“We think we're already seeing some signs of that,” Bailey said in an interview on Thursday with Bloomberg Television. “Look at the gap between consumer confidence and business confidence. We had a very weak retail sales number a few weeks ago.”
The remarks follow the U.K. central bank's decision to raise interest rates to the highest since 2009 to fight inflation. Bailey also delivered a bleak outlook for the recovery, saying higher prices are starting to constrain growth and may tip the economy into recession.
The BOE's main forecast is for inflation to subside next year after exceeding 10% this year, five times the level targeted. Higher interests rates are part of the program to bring price growth back to the target.
“A lot of the work in terms of the cure is going to be done by the fact we're experiencing a very large shock to real incomes in this country coming from outside the country -- a terms of trade shock,” Bailey said. “It's energy, food and some core goods.”
“What we've got is inflation going up and this big push down in real incomes. And it's this real income push that we think will do a lot to lower inflation.”
Bailey acknowledged there are “upside” risks to inflation and said policy makers are watching carefully.
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