Bailey Says Inflation Is Ultimate Test For Boe

On Tuesday, Andrew Bailey, the Governor of the Bank of England, said that its independence would be tested, as it attempts to bring down inflation from over 9% to its target of 2%.

Bank of England’s independence

The increase in the cost of living has become a big political issue, as there is now an ongoing debate over choosing the next prime minister for replacing Boris Johnson. There are some lawmakers of the Conservative party who believe that the Bank of England had continued its asset purchasing program for too long and had been too slow in raising its interest rate.

The Bank of England (BoE) decided to take this step last December. Giving a speech, Bailey asserted that the most important demonstration of their independence was to bring inflation down to the target they have set. It would be the ultimate test of the banking system.

Since December, the British central bank has hiked up its interest rate about five times as it attempts to prevent the soaring inflation from becoming embedded into the country’s economy. Its next policy meeting is scheduled for August and the bank is expected to hike the interest rates once more.

Interest rate hike

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Investors believe that there is a 60% possibility that the August 4 meeting of the Bank of England would see the interest rate rise by 50 basis points. Back in June, the British central bank had asserted that it was ready to act ‘forcefully’ should the situation demand it.

Bailey was questioned about the independence of the Bank of England at an event hosted by think-tank OMFIF. He responded that they would bring inflation down to the target they have set. He had said earlier that they were ready to respond forcefully if inflationary pressures continue to persist.

He stated that the purpose of the language was to clarify that they were exploring more options than the hike in interest rate by just 25 basis points.

No signal for the next moves

During his speech on Tuesday, Bailey said that their focus was on the economy, both British and global. He added that his comments were not a signal for the next moves of the central bank. Bailey also informed lawmakers on Monday that there would be a sharp decline in inflation in the coming year.

He also said that the Monetary Policy Committee (MPC) had a range of things to discuss in the next monetary policy meeting scheduled in August. He stated on Tuesday that plans of further reversing quantitative easing would also be announced after the meeting, but he reiterated that they would do it gradually so as not to worsen market conditions.

Bailey went on to say that the Bank of England would outline a new open market facility for ensuring liquidity in the market. This would happen after the sales of gilt hit a point that is close to the underlying demand of banks for the reserves of the central bank.

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