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Bank of England Governor Andrew Bailey hit back against attacks from politicians in the ruling Conservative Party, saying the institution’s independence is more important than ever as it faces the toughest inflation test since it gained authority to set interest rates in 1997.
In his annual Mansion House speech, due to be delivered before the Chancellor of the Exchequer and City grandees on Tuesday night, Bailey stressed that the BOE was given independence precisely for such tricky times, and emphasize that now is the time for the system to prove its value.
He was responding to criticism that the BOE moved too slowly to fight inflation, which is on track to exceed 11% this year, more than five times the 2% target. Conservatives vying to replace Boris Johnson as prime minister have faulted Bailey and his colleagues for allowing prices to rise too quickly.
The inflation challenge “emphatically does not mean the regime has failed,” Bailey said, according to text released by the BOE. “Far from it. The regime was set up for times exactly like these. The regime, founded on central bank independence, is now more important than ever. The worth of any regime is tested in the difficult, not the nice, times.”
The BOE has become a political target with inflation delivering the sharpest squeeze on consumer spending power in at least two decades. Real wages are falling, and unions representing public sector workers are threating to strike unless the government boosts pay.
Foreign Secretary Liz Truss, the bookies favorite to win the contest, took aim at the BOE’s struggle over the weekend, hinting at reintroducing a money supply target. She also said the next government should look at other economies that had been successful in controlling inflation, citing the Bank of Japan. Other hopefuls also had strong words about the BOE’s performance.
Still, Chancellor of the Exchequer Nadhim Zahawi was more supportive at the Mansion House event, praising the BOE’s track record on inflation and adding that, “I know they have complete determination to do what is required.”
“We are doing everything we can to make sure that expectations about higher inflation do not become embedded,” Zahawi said. “The country should feel confident that we can and will get inflation under control.”
Read More: UK Leadership Contenders Suggest Changing BOE Mandate (2)
In his speech, Bailey quoted the 1997 Mansion House speech of his predecessor Eddie George, the BOE’s first governor after independence.
“The technical implementation of monetary policy is not at all an exact science. It operates with long and unpredictable time lags so that we are necessarily continuously straining to peer into the future, relying substantially upon uncertain economic forecasts and carefully considered, but ultimately subjective judgments about the probabilities – and of risks – surrounding them. So I welcome the Chancellor’s detailed reformulation of our marching orders, which acknowledges the volatility of the real world.”
These are “wise words, which are more relevant than ever today,” Bailey said.
Bailey said there are “no ifs or buts in our commitment to the 2% inflation target. But we recognise a trade-off in a situation of high inflation and weakening growth.”
That trade-off explains the BOE raised rates gradually in quarter-point steps since December. Bailey said he expects inflation to “fall very rapidly next year, and return to target in 2023, and then go below target.”
(Adds Zahawi quotes from seventh paragraph.)
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