Andrew Bailey, Governor of the Bank of England.
Simon Dawson | Bloomberg via Getty Images
LONDON – Governor Andrew Bailey has sought to defend the Bank of England’s cautious approach to tightening monetary policy, saying policymakers are considering the broader picture of an inflationary shock the UK economy is currently experiencing.
The BOE may have completed its fourth straight hike on Thursday, but three dissenters at the bank and a forecast of 10% inflation have left many wondering if it should act more aggressively — such as with higher rate hikes .
“I think it’s important to put that in the context of the shock that we’re seeing,” Bailey told CNBC’s Geoff Cutmore on Thursday after the bank’s 25 basis point move.
“We’re seeing this unprecedented big shock to real income in this country coming from abroad, it’s a shock to trade conditions. … And that’s having a negative impact on real income, which we think will impact activity in a big way during the course of this year,” he said. Real income is a measure of a person’s purchasing power after accounting for inflation.
Like many central banks around the world, the BOE is tasked with steering the economy through an inflationary spurt exacerbated by Russia’s unprovoked attack on Ukraine.
The Bank’s Monetary Policy Committee approved the hike by a majority of 6-3, raising the base rate to 1%. The BOE said minority members would prefer interest rates to be raised by 0.5 percentage point to 1.25%. The Bank’s main reference rate helps set the cost of all types of mortgages and loans in the UK
Sterling hit a low of 1.2393 against the dollar early Thursday afternoon London time, its lowest level since July 1, 2020.
In its updated forecasts, the bank pointed to an imminent risk of recession for the world’s fifth-largest economy. The BOE now expects gross domestic product to contract in the last three months of the year, partly reflecting the projected sharp rise in household energy bills in October.
Bailey added the bank is already seeing signs of declining consumer confidence and is starting to form a large gap relative to UK business confidence
“So I think the answer to the question ‘What is monetary policy doing?’ really has to start with what the impact of this shock will be,” he said.
“We believe the impact of this shock in terms of lowering activity and lowering inflation will be much larger. And so the way we calibrate monetary policy needs to take that into account,” Bailey said.
— CNBC’s Sam Meredith contributed to this article.