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Interest rate hike ‘will be higher than expected’

Andrew Bailey
Andrew Bailey: pressures

Bank of England governor Andrew Bailey has warned of higher than expected rises in interest rates to tackle persistent inflationary pressures.

Mr Bailey, speaking in Washington, said the Bank “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.”

Addressing the annual International Banking Seminar, he said his first discussions with new Chancellor Jeremy Hunt had been a “meeting of minds” and indicated that the former Chancellor Kwasi Kwarteng had erred in initially fixing his fiscal statement for the 23 November. He later agreed to bring it forward to 31 October.

“This is the correct sequence in my view,” said Mr Bailey. “We will know the full scope of fiscal policy by then.”

The Bank’s monetary policy committee next meets to determine interest rates on 3 November.

Mr Bailey added: “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 markets are anticipating a 75 basis points rise, taking the base rate from 2.25% to 3%, though Mr Bailey’s comments may point to a full 100 basis points rise.

Mr Bailey said the action being taken should cap inflation, “we think at around 11%, and it should lead to a more rapid fall in inflation back towards target.”

He said: “UK financial markets have experienced some violent moves in the last few weeks particularly at the long-end of the Government debt market.

“This has put the spotlight on flaws in the strategy and structure of one important part of a lot of pension funds.

“The Bank of England has had to intervene to deal with a threat to the stability of the financial system, our other core objective.

“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 are strictly temporary, and have been designed to do the minimum necessary.”

Mr Hunt today said there had been mistakes by the Truss-Kwarteng partnership and difficult decisions will be needed “across the board” on tax and spending.

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