The Bank of England has taken too long to raise interest rates and will need to “move faster” to get a grip on inflation, one of its former deputy governors has said.
Sir Charlie Bean, who was a senior official on Threadneedle Street throughout the financial crisis, criticised the Bank’s recent decision to hold off from raising rates until December and said households should brace for a looming “shock”.
The Bank’s Monetary Policy Committee raised the cost of borrowing from 0.1pc to 0.25pc last month, as it warned that inflation was set to reach 6pc in the spring.
But the move came after it caught financial markets off guard by holding rates steady in November despite heavy hints of a rise.
Sir Charlie said that the Bank’s stance “has erred too much towards looseness through the course of the past few months”, adding that he was “surprised” by the decision to hold off in November.
“If I was on the MPC, I would have been in favour of moving a little bit earlier than they have done,” he said.
The economist said the delay was not a “significant policy error” but would likely mean that rate-setters have to “move faster” with further increases as inflation has already soared to its highest level since March 1992.
Analysts now fear the likely peak could be above 7pc in April as energy prices spike.
Experts predict another rate hike to 0.5pc from the MPC next week, marking the first time it has made back-to-back increases since June 2004.
The consumer prices index hit 5.4pc in December. The retail prices index is also at a 30-year high of 7.5pc, threatening to add billions to the Government’s interest payments on its £2.3 trillion debt pile due to index-linked gilts.
Families and businesses also face a £12bn hit in April from Rishi Sunak’s planned rises in national insurance to pay for NHS backlogs, while frozen income tax thresholds squeeze more cash from salaries.
Sir Charlie added: “Living standards for people in this country will be lower. It’s certainly going to come as a shock to consumers as we go through the first part of this year.”
But the former official added that the Bank was powerless to influence energy prices and that the Government needs to step in to help ease the cost-of-living squeeze.
With Bank action taking two to three years to feed through, “it is only the Government through its various fiscal tools that can do anything there”.
Sir Charlie also cautioned over a hit to UK economic growth of up to 2pc from the omicron variant and the restrictions imposed before Christmas.