Bank of England will do 'whatever is necessary' to tackle spiralling inflation

The Bank of England will do “whatever it takes” to prevent inflation from seeping into the UK economy, its deputy said today, as it eyed a record-breaking rate hike.

Deputy Governor Sir Jon Cunliffe told BBC Radio 4’s Today program that the bank was ready to take action after inflation hit a 40-year high of 9.1 per cent in May – with forecasts expecting that it will exceed 11 percent by October.

And the bank’s top economist Huw Pill said separately in a speech that interest rates may need to rise faster to curb “uncomfortably high” inflation.

It points to the possibility that the bank could raise rates by half a point to 1.75 percent in August, from the current 1.25 percent, which would mark the biggest single hike the bank has seen since independence in 1997 made.

The bank has hiked rates for five straight meetings to cope with the recent surge in inflation as the cost of living crisis tightens Brits’ wallets.

But so far each rise has been a quarter-point, with the bank taking a phased approach to offset the risk of economic growth stalling.

Sir Jon said the bank faced a difficult balancing act, adding: “We will do whatever is necessary to ensure that this bout of inflation sweeping through the economy does not leave us with an ongoing domestically-driven inflation problem.

“We will act to ensure that doesn’t happen.”

But he said: “What we expect is that the pressure on the cost of living will actually hit people’s spending and that will cool the economy.

“We are seeing signs that the economy is already slowing down.”

It comes after the bank said in June it would be “acting forcefully” to combat the threat of long-term high inflation.

Mr Pill – who succeeded Andy Haldane in that role last September – told a central bank conference hosted by King’s Business School that the pledge “both reflects my willingness to adopt a faster pace of tightening in this tightening cycle than has been implemented to date, and at the same time to emphasize the conditionality of such a change in pace through the flow of new data and analysis”.

He stressed that “much remains to be resolved before we vote on our August political decision”.

“How I vote on this occasion will be dictated by the data we see and my interpretation of it,” he said.

Fears are mounting that a recession – defined by two straight quarters of falling production – could be imminent as the cost crisis hits consumer spending.

Economists expect the economy to contract in the second quarter and there are concerns that year-end output could collapse if rising energy prices lead to the price cap being lifted again in October.

The bank has already warned that inflation will rise to over 11 percent in October.

But Mr Pill echoed Sir Jon’s concerns about the threat to growth, adding: “The MPC (Monetary Policy Committee) must walk a ‘narrow path’ in managing these risks.”

It comes after the BoE warned today that the outlook for the economy has “deteriorated significantly”.

In a somber update, the bank said households were facing serious pressure on their finances – and warned of a spate of business failures.

With families struggling to afford the rising costs of essentials, the bank also warned that the house price boom could be coming to an end.

Danni Hewson, financial analyst at investment platform AJ Bell, said: “We’re about to have a long, cold winter.”

In its latest Financial Stability Report, the bank said: “The economic outlook for the UK and globally has deteriorated significantly.

“Following Russia’s illegal invasion of Ukraine, global inflationary pressures have sharply intensified.”

Energy prices have skyrocketed as western countries shunned Russian oil and gas exports. And food prices are also soaring, as Russia and Ukraine are major exporters of staples like wheat and sunflower seeds, which are used in cooking oil.

Now central banks around the world have been forced to raise interest rates to encourage households and businesses to save rather than spend in the hope that this will bring prices down.

But it’s also hurting the Covid recovery, and several economists are now predicting the UK will slide into recession in the coming months.

The Bank of England said a number of risks are ahead, including developments in the Russia-Ukraine conflict, which “could affect UK financial stability”.

So far, household debt in general has remained broadly unchanged relative to income.

But the bank believes the worst is yet to come. It added: “The rise in the cost of living and interest rates will put increased pressure on UK household finances in the coming months.”

Fixed-rate mortgage holders who are currently protected from rising interest rates could be in for a shock when they next refinance.

And companies that borrowed during the pandemic when their stores were shut down must now repay those loans — at a time when costs are skyrocketing and interest rates are rising.

Energy prices have been pushed up by the Russian invasion of Ukraine and more recently by strikes in Norway.

This is proving difficult not only for households – who are expected to be hit with a further increase in their bills when energy regulator Ofgem carries out the next price cap review in October – but also for businesses.

According to the bank’s report, almost a third of small and medium-sized businesses don’t have enough cash for a week.

But these smaller firms account for about half of UK employment – jobs that could be lost if firms struggle to stay afloat.

Ms Hewson said: “At the moment the long, bright days and warm temperatures are not only keeping energy costs down, they are helping to bring at least some extra visitors onto the high streets.

“But there’s a long, cold winter waiting in the wings and one that can’t be hidden under bushels of tinsel and pretty lights, especially as the tills are expected to brighten.”

The bank said the pressure of rising costs and higher interest rates “is likely to result in some business failures”.

But High Street lenders are well prepared to weather an economic storm, the bank added, as it encouraged them to continue lending to businesses and households where possible to keep the economy afloat.

Threadneedle Street officials even pushed ahead with plans to increase banks’ cash buffers, which should be built up in good times to give lenders some leeway in a crisis.

The buffer requirement, which was reduced to zero during the pandemic to encourage banks to lend, will now be increased to 2 percent of a bank’s assets.

But it is also a sign that the Bank of England is beefing up the UK’s defenses in preparation for an economic storm.