LONDON (Reuters) – Bank of England Governor Andrew Bailey said on Wednesday there was “very clearly” a risk that high inflation gets embedded in Britain’s economy if there is a cycle of higher prices pushing up wages.
“It’s not just wage setting, it’s also price setting … it’s both,” Bailey told lawmakers. “There is very clearly an upside risk there. The upside risk … comes through from the second-round effects.”
Bailey told parliament’s Treasury Committee that there were also downside risks that inflation comes in lower than the BoE’s forecasts over the next three years.
The BoE raised interest rates to 0.5% this month from 0.25%, but four of its nine monetary policymakers voted for a bigger increase to 0.75%, which would have been the first half-point rise since BoE independence in 1997.
British inflation hit its highest in nearly 30 years in January at 5.5%, and the BoE expects it to peak at around 7.25% in April when a 54% rise in regulated household energy tariffs takes effect.
Investors are fully pricing in another 25 basis-point rate hike at the BoE’s next scheduled meeting which concludes on March 17 followed by another in May.
Bailey also said the British central bank’s top monetary policymakers did not have a big disagreement on the level that interest rates need to reach eventually, even if they were divided this month about the pace of the increases.
“It’s important not to put too much emphasis on … whether we took a different view on the level that we expected to get to, as opposed to the pace by which we get there,” he said.
(Reporting by David Milliken, Muvija M and James Davey; Writing by William Schomberg)
