The Bank of England will have to put up interest rates even further if companies raise prices in a bid to beat inflation, the bank’s governor has warned.
In an interview with BBC Radio 4’s Today programme, Bank of England boss Andrew Bailey said: “If all prices try to beat inflation we will get higher inflation.”
He pleaded with companies to remember that inflation will drop sharply later this year when they are setting prices.
Bailey said: “I would say to people who are setting prices—please understand if we get inflation embedded, interest rates will have to go up further, and higher inflation really benefits nobody.”
But he insisted that he was not saying that companies should take hits to their profits or that some firms are putting up prices more than is necessary.
He said that companies have to set prices based on the costs they face, which have been rising rapidly over the last year.
But he added that, when looking to set future prices, companies should “bear in mind” that these cost rises are expected to slow considerably by the end of the year.
Firms Under Pressure
Commenting on the February inflation figures, the British Retail Consortium (BRC) said that businesses are also under immense pressure in the high-inflation environment.BRC chief executive Helen Dickinson said that the energy crisis caused by the Russian invasion of Ukraine has pushed up prices for “producers, retailers, and households.”
She said: “Food remained one of the strongest contributors to overall inflation as the high price of animal feed and fertiliser has driven up the price of many staples, while the weaker pound made importing products such as vegetables from Europe more expensive.”
Dickinson said that retailers are “committed to doing everything they can to keep the price of essentials low through expanding value ranges and offering discounts for vulnerable groups.”
‘Blunt Instrument’
Some business groups have expressed reservations about the central bank’s decision to raise interest rates.David Bharier, head of research at the British Chambers of Commerce, said, “Interest rate rise alone is a blunt instrument that doesn’t address some of the fundamental causes of inflation such as failure in the energy market and global supply chain shocks.”
He said that small and medium-sized businesses, like consumers, are “getting hit from both rising prices and rising borrowing costs.”
“The only way out of this vicious cycle is through taking action to boost economic growth, through investment in infrastructure, skills, and global trade,” he added.
The Institute of Economic Affairs (IEA), a London-based free-market think tank called the bank’s decision “boringly predictable.”
IEA Economics Fellow Julian Jessop said: “With inflation so far above its 2 percent target, it was easy to justify another small rate increase, though the MPC has at least switched from half-point to quarter-point hikes.”
But he said: “There was already a strong case for a pause this week to assess the full impact of the tightening of monetary and financial conditions that have already taken place.
Recession Risk Receding
In his BBC interview, Bailey also said that he thinks that the risk of a recession has receded in recent weeks after the Bank of England upgraded its forecast for the second quarter of the year.It now expects gross domestic product (GDP) to rise slightly in the April to June period, up from a previous forecast that it would drop 0.4 percent in those months.
Bailey said that “the prospects for the economy in terms of growth are now better, considerably better.”
He added: “I think it is reasonable to say that there’s a pretty strong likelihood that we will avoid a recession this year.
“But we’ve still got to put in place the conditions for much stronger growth in the economy and sustainable growth in the economy.”
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