The Governor of the Bank of England has blamed the war in Ukraine as the UK’s highest inflation in three decades and warned that ‘doomsday’ food prices caused by the Russian invasion could have a disastrous impact on the world’s poor.
Defending Threadneedle Street ahead of Wednesday’s announcement of the biggest annual rise in four decades, Andrew Bailey told MPs that while he was unhappy with the level of price rises, 80% of the inflation overshoot was caused by factors beyond the control of the Bank.
Bailey said the Bank could not be expected to predict war in Ukraine, which he warned would have consequences for the UK and the developing world.
Countries like Egypt and Tunisia are heavily dependent on Ukrainian wheat and cooking oil exports, and the governor said his concerns about food supplies were heightened after speaking to Kyiv’s finance minister during the the IMF meeting last month in Washington.
“He said he was optimistic about planting crops, but right now there was no way to ship food and the situation is getting worse,” Bailey said. “This is not just a major concern for this country, but a concern for the developing world. I’m sorry to be apocalyptic but it’s a concern.
Official figures due on Wednesday are expected to show the annual inflation rate above 9%, with the Bank of England expecting that figure to top 10% when the energy price cap is raised further in October.
Asked if the Bank could have prevented inflation from skyrocketing by raising interest rates sooner, Bailey told the Treasury select committee: “I don’t think we can. I don’t think we can foresee a war in Ukraine.
“Another factor we are facing at the moment is a new stage of Covid, which affects China. We have seen a series of supply shocks after each other and it is unprecedented. »
The Bank’s nine-member Monetary Policy Committee has raised interest rates at its past four meetings after doubling its forecast for peak inflation this year from 5% to 10%.
“I don’t feel happy at all and it’s a bad situation,” the governor said after lawmakers asked him to explain why the Bank waited until December before acting.
Following reports over the weekend that unnamed cabinet ministers questioned whether the Bank should remain independent, Bailey said: “This is the biggest test of the monetary policy framework in 25 years. There is no doubt about it.
The governor reiterated his call for wage moderation he made in February, urging the highest paid to set an example for workers who earn less.
“I think people, especially those with higher incomes, should think and think about asking for high pay raises,” he said. “It’s a social issue. But I don’t preach about it. It’s not for me to tell people what to do.
“In that sense, I know I may have been interpreted as doing this, but I wasn’t. What I was saying was maybe people should think about it, especially people in this situation.
Paul Nowak, deputy general secretary of the Trades Union Congress, said: “It is incredible that the Bank of England has repeated its calls for workers to take a pay cut – while saying next to nothing about the surge in profits at BP and Shell. . The last thing workers need right now – in the midst of the worst living standards crisis in generations – is to see their wages kept down.
Asked about future dangers to the cost of living, Bailey said there could be prolonged bottlenecks in the supply chain due to disruptions in China or rising energy prices if Russia decided to cut off the gas supply.
However, he said the Bank could not be expected to foresee recent events. “I see comments based on hindsight, but we have to take [monetary policy] decisions based on facts and evidence at the time.
His comments followed UK energy regulator Ofgem’s announcement that it plans to change its price cap four times a year, up from two currently.
The regulator published a consultation on Monday on proposals to introduce further revisions to the price cap in January and July, on top of existing changes in April and October, in a bid to respond more quickly to market volatility.
Meanwhile, the RAC has revealed that the average price of diesel on the forecourts has hit a record just over £1.80 a litre, with experts warning of further rises if the EU plans to ban imports of Russian oil.