Interest rates will stay low hints Bank governor Andrew Bailey

They were frozen at their record low of 0.1 percent when the Bank’s Monetary Policy Committee (MPC) met earlier this month. But Mr Bailey said the move was a “very close call”, with a growing sense that the base rate will be raised in January to tackle increasing prices.

The latest Consumer Price Index inflation rate was 3.1 percent for September ‑ well above the Bank’s two percent target.

Ratesetters have warned that higher energy prices will drive inflation to 4.5 percent imminently and hit around five percent next April, the highest level for a decade.

The central bank boss was explaining the MPC’s decision to freeze interest rates to MPs on the Treasury Select Committee in Westminster yesterday.

Mr Bailey said the Bank does not see the “basic context” of low interest rates changing in the foreseeable future ‑ as he rejected claims he U-turned on raising interest rates at last week’s MPC meeting.

He insisted he never said that the Bank would do so, after the financial markets reacted poorly to the decision to hold.

“In terms of emphasising the primacy of the inflation target and the link to medium-term inflation expectations, I thought it was critical that we put our foot down,” he said. 

“I am concerned that there is a view in some quarters that we’ve gone off that and just sort of never admitted it.”

Nevertheless, Mr Bailey also told MPs that there are major concerns about the current inflationary picture.

“I’m very uneasy about the inflation situation ‑ I want to be very clear on that,” he said. 

“It is not of course where we wanted to be, to have inflation above target.”

He said he decided that it makes sense to wait to see the impact of furlough ending in September before thinking of raising interest rates.

“I felt there was something to be said for waiting to see this evidence on the labour market from the official data which we will start to get on Tuesday, interestingly,” he said.

Members of the MPC voted by seven-to-two in favour of keeping the base rate unchanged. Two members, including Michael Saunders, were outvoted in calling for a rise to 0.25.

Explaining his vote, Mr Saunders told MPs: “The labour market is tight, with widespread skills shortages and we’ve seen the average pace of pay growth pick up to a little bit above the pre-pandemic pace and pay growth for new hires is picking up.

“I felt that the likelihood of a pickup in general pace of pay growth was sufficiently high that we should start to withdraw some of the stimulus that was put in place.”

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