Market News

Andrew Bailey has spent his time as Governor of the Bank of England in almost permanent crisis mode.

From Covid to the cost of living crisis, Bailey has had to steer the country’s economy through extraordinary events since he became Governor in March 2020.

The track record of Bailey and his colleagues since then has been patchy. The Bank of England was roundly criticised in the wake of the pandemic and the Ukraine war for failing to act quickly enough to tame a spike in inflation.

Now they confront a new crisis: a surge in oil and gas prices caused by the war in Iran, which is already driving inflation higher. At the same time, growth is expected to slow as higher fuel costs stymie activity.

Bailey and his colleagues will be desperate to avoid making another mistake when they meet for an interest rate decision on Thursday. But can they?

A combination of rising prices and slowing growth “puts central bankers in the most awkward position possible”, Megan Greene, an external member of the Monetary Policy Committee (MPC), has said.

Usually, rising prices would prompt increases in interest rates to calm inflation. But higher borrowing costs risk damaging an already weak economy.

At the same time, if policymakers keep rates too low then price rises could spiral out of control.

It puts policymakers in an unenviable bind.

Last month, the nine members of the MPC voted unanimously to hold interest rates at 3.75pc.

It was the first unanimous vote since 2021. However, that unity has already broken.

The situation in the Middle East is so uncertain and chaotic that there is little agreement on the right course of action.

Opinions on the MPC sit on a spectrum. At one end is Huw Pill, the Bank’s chief economist, who believes interest rates had already fallen too fast even before the closure of the Strait of Hormuz.

Officials cut rates from 5.25pc to 3.75pc between mid-2024 and the end of last year. Pill believes this was a mistake: inflation accelerated last year and has been above 3pc for the last 12 months. The Bank’s target for inflation is 2pc.

Battle against inflation

Now a new wave of inflation is here and Pill believes the Bank should ramp up interest rates to combat it.

“In the face of profound uncertainties” on energy prices and the way that spreads through the economy, he proposes setting the base rate in a way “that gives the most insurance against having a repeat of 2022”.

Pill said: “We have to entertain the possibility that [higher rates] may be required.”

“We need to retain a focus on our primary objective – getting inflation and maintaining inflation at the 2pc target.”