The Bank is worried about the “potential persistence of inflation”, Andrew Bailey said
By Dharshini David & Sam Gruet
Chief economics correspondent & business reporter, BBC News
UK inflation might not fall as quickly as some are hoping, the governor of the Bank of England has warned.
Andrew Bailey told MPs that Bank policymakers were more worried about the pace of price rises remaining high than financial markets appear to be.
Speaking to the Treasury Committee he said the Bank was concerned over the “potential persistence” of inflation.
Inflation fell to 4.6% in October from 6.7% in September, according to official figures.
That drop – measured by the Consumer Prices Index (CPI) – prompted the government to claim it had met its inflation target early, having pledged to bring down the level to below 5.4% by the end of the year.
Speaking ahead of the Autumn Statement on Wednesday, and as speculation mounts about possible tax cuts, Chancellor Jeremy Hunt said: “We met our pledge to halve inflation, but we must keep on supporting the Bank of England to drive inflation down to 2%. That means being responsible with the nation’s finances.”
Mr Bailey told the Treasury Committee that the rapid fall in inflation was good news, but that it could take some time before the Bank’s target of 2% was hit.
“We are concerned about the potential persistence of inflation as we go through the remainder of the journey down to 2%, and I think the market is underestimating that,” he said.
Up until September, the Bank had raised rates 14 times in a row to tame soaring inflation, which has been squeezing household budgets.
But it has now left rates on hold – at 5.25% – in its past two meetings.
On Monday, Mr Bailey had said it was “far too early to be thinking about rate cuts”.
Earlier on Tuesday, official figures showed government borrowing – the difference between spending and tax income – in October was a higher-than-expected £14.9bn, largely pushed up by higher benefit payments.
But the data, from the Office for National Statistics (ONS), also showed a smaller-than-expected deficit across the first half of the financial year, helped by higher tax receipts reflecting higher wages and inflation.
The ONS said the government had borrowed £98.3bn in total since the start of the financial year. That is £21.9bn more than a year earlier, but less than the £115.2bn that was forecast by the UK’s independent fiscal watchdog, the Office for Budget Responsibility (OBR), in March.
The figures on the health of the public finances are mixed news for the chancellor as he puts the finishing touches to Wednesday’s Autumn Statement, and a reminder that he may opt not to give households large tax cuts yet.
Some economists think the chancellor will now meet his self-imposed rules on borrowing with around £20bn to spare, which has raised speculation of tax cuts.
Ruth Gregory at Capital Economics said: “With the election drawing nearer, the chancellor may not be able to resist the temptation to unveil a pre-election splash.”
However, any pre-election splash in 2024 “will almost certainly be followed by hefty tax rises in 2025 after the election,” she added.
Sir John Gieve, a former deputy governor for fiscal stability at the Bank of England, said the government’s finances had been improved by higher wages and higher inflation, which had increased receipts from income tax and VAT .
“He hasn’t increased tax thresholds [on income tax]. The question is: should he give a little of this back?” he asked.
But others expect the focus of Wednesday’s statement will be on helping business, with households perhaps having to wait until next spring for announcements on substantial giveaways.
Responding to the ONS data, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the latest figures provided “a timely reminder that the task of restoring the public finances to a sustainable footing is far from complete”.
He also predicted that the majority of any tax cuts announced in the Autumn Statement are not likely to come into effect until after the next general election.
