Andrew Bailey, Governor of the Bank of England, defended its record after a recent onslaught of political criticism over its “failure” to prevent inflation from reaching a 40-year high and the threat of worse to come.
Mr Bailey, speaking in Austria, said the Bank judged the extent of recent interest rises to be appropriate given the coming hit to demand from soaring energy prices.
“What I reject is the argument that in our response to Covid the Bank’s Monetary Policy Committee let demand get out of hand and thus stoked inflation. The facts simply do not support this,” Mr Bailey said.
UK economic output in March was just 0.6 per cent above its pre-pandemic level and far behind where it should be had the economy continued to grow uninterrupted by the pandemic.
“What we do have is a very tight labour market. But that does not look like a story about rapid demand growth,” Mr Bailey said.
Tory MPs and Mr Bailey’s predecessor, Lord Mervyn King, have claimed that the Bank has reacted too slowly to halt a rise in consumer prices that are up 9 per cent compared with a year ago.
He said that gross domestic product (GDP) is only just a little higher than it was before Covid and if the pandemic had not have happened it probably would have been substantially higher.
He said the UK Labour force has shrunk by around 1 per cent since the onset of Covid.
“The choice of policy actions is influenced by the nature of the shock we are facing,” Mr Bailey said. “In the UK we are facing a very big negative impact on real incomes caused by the rise in prices of things we import, notably energy. We expect that to weigh heavily on demand.”
Last week, Lord King, the Bank’s governor in 2008 when financial markets crashed, criticised the policy of the institution during the pandemic. He said the Bank printed more money, so-called quantitative easing, at the same time as manufacturers, restaurants and other service companies closed, resulting in more money in the economy, but less stuff to spend it on, which pushed up prices. His criticism included central banks more widely as well as an intellectual failure by economists.
Mr Bailey also re-emphasised that the Bank could raise rates further to help combat inflation. “We have raised the official rate four times so far and have made clear… we are prepared to do so again.”