The governor of the Bank of England said he rejects the argument that it let demand “get out of hand” leading to higher inflation.
Speaking at the Annual Economic Conference in Vienna, Andrew 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. We judge the appropriate degree of monetary tightening taking that into account.
“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.”
Bailey explained this is a time of very large external economic shocks most recently from Russia’s invasion of Ukraine.
It is leading to visible price rises across energy, goods and some food prices and “is by far the main cause of high inflation, and is painful, particularly for those less well off”.
He said that monetary policy can’t anticipate and stop the effects on inflation of shocks, but said monetary policymakers “can and must take the actions needed to return inflation to target over a period that avoids unnecessary volatility in the economy”.
Bailey added that in the UK, we’re facing a big negative impact on real incomes caused by the rise in prices of things we import, notably energy. Further, we have a very tight labour market, and the labour force has shrunk by around 1% since the onset of Covid.
He said: “The job of the Bank of England is to return inflation to target at a time when a very large headwind from external shocks, and an internal shock from a fall in the labour force, are reducing real incomes but risk leading to persistence in domestic wage and price setting, so-called second round effects.
“The Bank of England will, as always, take monetary policy decisions to ensure that the inflation target is met over the medium term.
“We have raised the official rate four times so far and have made clear that in order to bring inflation down to target we are prepared to do so again based on the assessment at each of our meetings.”