Interest rates will have to be raised higher than initially hoped in the face of inflationary pressures, the Bank of England governor has suggested.
Speaking at an International Monetary Fund event in Washington, Andrew Bailey also said there had been “a very clear and immediate meeting of minds” with the new Chancellor Jeremy Hunt on the need for financial stability and the measures to achieve it.
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It comes after Mr Hunt has said there “were mistakes” in last month’s government mini-budget, which triggered market turmoil, and pointed out some taxes may have to rise and others might not fall as much as planned.
The BoE is due to announce its next decision on interest rates on 3 November and many investors think it will either raise them from their current level of 2.25% to 3% or possibly 3.25%, both of which would be much bigger moves than usual.
Mr Bailey said: “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.”
The bank previously predicted the rate of inflation would peak at 11% in October.
Mr Bailey said the bank would assess the impact of the government’s energy support scheme and the 31 October budget statement of Mr Hunt, who took up the role on Friday after Kwasi Kwarteng was sacked.
He added: “The MPC (Monetary Policy Committee) will respond to all this news at its next meeting in just under three weeks from now.
“This is the correct sequence in my view. We will know the full scope of fiscal policy by then.”
In a further major U-turn on Friday, Prime Minister Liz Truss scrapped a freeze in corporation tax rate and said she would instead allow it to rise from April, as planned by Britain’s previous government.
The government had already rowed back on ditching the top 45p tax rate for the highest earners in the face of a Tory backlash.
Ms Truss also said spending would increase by less than planned.
Mr Bailey said: “I can tell you that I spoke to Jeremy Hunt, the new chancellor, yesterday (Friday).
“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.
“Jeremy is now working on what will be the fiscal statement.
“It’s not for me and it’s not appropriate for me to constrain the choices he makes.
“But a very clear message I would give and it’s 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 said the bank was able to operate monetary policy – chiefly interest rates – to manage the economy and also make financial stability interventions to address issues such as the recent surge in British government bond yields that threatened some pension funds.
The BoE ended its emergency bond-buying on Friday.
“In these difficult times, we need to be very clear on this framework of intervention,” Mr Bailey said.