Bank of England governor Andrew Bailey has said policymakers “have the option” of acting more forcefully to rein in inflation if needed.
Bailey did not rule out raising rates by 50 basis point at the next meeting, saying that the decision is still a month away.
“There will be circumstances in which we will have to do more,” Bailey said at the European Central Bank’s (ECB) conference in Sintra, Portugal, on Wednesday.
“We’re not there yet in terms of next meeting. But that’s on the table. But you shouldn’t assume it’s the only thing on the table,” he added.
The BoE has stuck to its series of gradual increases in borrowing costs, raising rates by a 25 basis points to 1.25%.
Threadneedle Street now expects inflation to surpass 11% and markets are betting there is an 80% chance that it will raise rate by 50 basis points in August.
Bailey said it was now “very clear” that the UK’s economy was at a turning point and starting to slowdown.
He added that the task of central banks is "unquestionably" to return to low inflation.
"But, in fulfilling that task, what we are observing is structural changes. I think COVID is leaving a legacy on labour markets, and certainly, the European security situation has changed and that is affecting supply chains, resilience of the whole supply system," he said.
Bailey said he’s prepared to set monetary policy to offset inflationary pay raises, adding that there’s no one number that captures the scale of wage increase that would fit comfortably with the BoE’s target to contain prices.
He has been previously criticised for asking workers not ask for big pay rises, to try and stop prices rising out of control. Bailey said in Sintra that now more would agree with him.
Federal Reserve chair Jerome Powell warned it was important to avoid persistent inflation and that time was of the essence.
“The clock is kind of running on how long you will remain in a low inflation regime. The risk is that because of the multiplicity of shocks you start to transition into a higher inflation regime and our job is to literally prevent that from happening and we will prevent that from happening,” he said.
The Fed chair said the central bank’s job was to find price stability and the maximum employment in the new economic situation. It has been increasingly more hawkish to tackle inflation, to the point where markets fear it will spark a global recession.
“The aim of that [interest hikes] is to slow growth down so that supply can have a chance to catch up,” Powell said. “It’s a necessary adjustment that needs to happen.”
Powell said that slower economic growth is a possible and likely outcome in dealing with high inflation.
"Since the pandemic, we've been living in a world where economy is driven by very different forces. We know that. What we don't know is whether we will be going back to something that look like what we had before," he said.
"In the meantime, we had a series of supply shocks, we've had very high inflation across the world. We're learning to deal with it," he told the panel titled "Challenges for monetary policy in a rapidly changing world."
Powell argued that the US economy is in a strong shape to deal with the Fed's higher interest rates.
"We hope that growth still remains positive. Households are in a very strong financial shape, they still got a lot of excess savings. Overall, the US economy is well-positioned to withstand to monetary policy," he said.
While Powell was emphasising the Fed’s do-whatever-it-takes approach to controlling inflation in Sintra, back in London the BoE’s next new policymaker was taking a more dovish stance in parliament.
Meanwhile, Swati Dhingra spoke to the Treasury Select Committee on Wednesday in a pre-appointment meeting that assessed her suitability for a member of the monetary policy committee (MPC).
Dhingra, who is an associate professor of economics at the London School of Economics (LSE), faced questions on her views on inflation and the Bank of England’s recent decision on interest rates.
If she had been a member at the time of the recent hike, she admitted she would have sided with a larger increase, along with the dissenting three members.
However, she soon backtracked on her hawkish stance, adding that the latest consumer confidence index data on Tuesday showed, in hindsight, that there is room for a more gradual approach.
Speaking on inflation, she said: “Just taking how things are at the moment, I think the monetary policy report forecasts are fairly on target, in the sense that there will be some pressure in October, but we should expect that this will eventually drop out of the index.”
Inflation reached a 40-year high of 9.1% in the year to May, and is widely expected to hit double figures at a peak in October, before coming back down.
She is due to join the Monetary Policy Committee in August, replacing the hawkish Michael Saunders.