Bank of England Governor signals interest rates could rise again

Interest rates may have to be raised higher than initially expected to tackle inflation, the Governor of the Bank of England has suggested.

It comes as Andrew Bailey said that he spoke to the new Chancellor Jeremy Hunt on Friday and had an “immediate meeting of minds”.

In a speech in Washington, Mr Bailey reiterated that Bank officials will “not hesitate” to raise interest rates if necessary to tackle inflation, while warning that a “stronger” response than previously anticipated could be required.

Public comments by Mr Bailey have taken on increased significance in recent weeks, after the Government’s mini-budget spooked the markets, sent the pound plummeting and forced the independent Bank of England to intervene in a bid to restore financial stability.

The political and economic chaos unleashed by then-chancellor Kwasi Kwarteng’s tax-cutting budget eventually culminated in his sacking on Friday by Prime Minister Liz Truss, as she continues in her bid to restore her Government’s fiscal credibility.

Mr Hunt will now deliver the Government’s fiscal plan at the end of the month, a statement the new Chancellor has admitted will be more akin to a full Budget.

In his short address, Mr Bailey acknowledged what he called the “violent moves” in the UK markets as he signalled that interest rate could be in line to increase again.

On September 22 the Bank’s Monetary Policy Committee (MPC) raised rates by 0.5 percentage points to 2.25%.

Speaking at the G30 annual international banking seminar, Mr Bailey said: “The UK Government has made a number of fiscal announcements and has set October 31 as the date for a further fiscal statement.”

He said that the Bank’s monetary policy committee “will respond to all this news at its next meeting in just under three weeks from now”.

Mr Bailey added: “This is the correct sequence, in my view. We will know the full scope of fiscal policy by then but I will repeat what I have said already: We will not hesitate to raise interest rates to meet the inflation target.

“And, as things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.”

Taking questions after his address, Mr Bailey said: “I can tell you that I spoke to Jeremy Hunt, the new Chancellor, yesterday.

“I can tell you that there was a very clear and immediate meeting of minds between us about the importance of fiscal sustainability and the importance of taking measures to do that.”

He continued: “It’s not appropriate for me to constrain the choices he makes, but the very clear message I would give, and it is a clear message for everybody, including a clear message for markets…

“I can tell you there is a very clear and immediate meeting of minds on the importance of stability and sustainability.”

Mr Bailey, who was intentionally circumspect in his comments, said his statement on Monday after the mini-budget was not something he was in “the habit of doing”.

“I thought I had to,” he said.

In brief remarks on fiscal policy that he said were relevant to the central bank, he spoke of the value of the “sustainability of fiscal policy”.

He also focused on “the need in our case to have the Office for Budget Responsibility (OBR) involved, that flying blind is not a way to achieve sustainability.

“For me the OBR is now very much back in the picture.”

Elsewhere in his speech, Mr Bailey said financial markets in the UK have experienced “violent moves” in recent weeks, as he discussed the Bank’s temporary bond-buying intervention in the wake of the mini-budget.

He told the audience: “There may appear to be a tension here between tightening monetary policy as we must, including so-called quantitative tightening, and buying government debt to ease a critical threat to financial stability.

“This explains why we have been clear that our interventions on the latter point are strictly temporary, and have been designed to do the minimum possible or necessary.”