Bailey warns Bank of England is taking a ‘hard line’ in battle against inflation

Stagflation vs rate hikes: Bank of England walks ‘thin line’ between curbing inflation and pushing UK into recession, Bailey warns



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The Bank of England is walking a “very tight line” between containing inflation and pushing the UK into recession, its governor has warned.

Andrew Bailey said there was a real risk that raising rates too quickly to curb rising costs of living could reverse the UK’s post-pandemic recovery. And he warned that there should be no “appeasement of Russia” — even if sanctions and higher energy prices cause more economic losses.

The comments come after his US counterpart, Federal Reserve Chairman Jay Powell, gave the strongest signal that US rates will rise by 0.5 percentage points next month, rather than the more usual 0.25.

Balancing: Bank of England Governor Andrew Bailey (pictured) said there was a real risk that raising rates too quickly would reverse the UK’s post-pandemic recovery

Central banks around the world rarely raise rates as they grapple with the highest rate of inflation in decades.

But there are fears that aggressively raising rates at a time when the economy is slowing down could lead to a recession.

Speaking at the Peterson Institute for International Economics in Washington, Bailey said: “We are in a period of unprecedented turmoil.

We have had shock after shock after shock – we have come out of the Covid period and now we are faced with the terrible things that Russia is doing in Ukraine.

“We are walking a very narrow line between fighting inflation and the impact of the real income shock on output and the risk that it could trigger a recession and alienate us too much in terms of inflation.” However, he added that “it is extremely important that we really support the Ukrainians.”

Bailey said: “There should be no appeasement of Russia because we have to deal with the economic consequences. We just roll up our sleeves and get down to business.”

The Bank of England has raised rates from their pandemic low of 0.1% to 0.75% three times in recent months as it steps up its fight against inflation.

Inflation has already hit a 30-year high of 7% and is set to reach 8%, a level not seen since the early 1980s.

Many believe that in the coming months the Bank will again and again raise rates in an attempt to bring inflation under control.

But at the same time, Britain is still recovering from the economic downturn caused by the Covid pandemic.

Bank officials are concerned that raising rates too quickly will stall activity as businesses and households hoard their cash and could even lead to a recession in the UK.

This is usually defined as two consecutive quarters of production cuts and is often accompanied by rising unemployment and falling living standards.

The Bank’s rate-setting monetary policy committee will meet again next month and is expected to raise rates to 1%.

Bailey stressed that other regions, including the eurozone and the US, have struggled with their own versions of the inflation problem.

But his colleague Katherine Mann, speaking at a Bank of England event earlier in the day, seemed to suggest it was more risky to delay raising rates.