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BoE faces ultimate test in battle against inflation, Bailey says

·2-min read
FILE PHOTO: A man walks past a window reflecting the Bank of England, in London

By David Milliken

LONDON (Reuters) -The Bank of England's independence will be put to the ultimate test as it seeks to bring inflation back down to its 2% target from more than 9%, Governor Andrew Bailey said on Tuesday.

The cost-of-living squeeze is a big political issue in the contest to replace Boris Johnson as prime minister, and some Conservative lawmakers believe the BoE was too slow to raise rates and wrong to continue asset purchases until last December.

"I'll be quite simple about this: I think overwhelmingly the most important demonstration of Bank of England independence is that we return inflation to target. It's the biggest test of the system," Bailey said in a speech.

The BoE has raised interest rates five times since December as it tries to stop the surge in inflation from becoming embedded in Britain's economy, and it is expected to increase them again at its August monetary policy meeting.

Investors see a roughly 60% chance of the BoE announcing a rare half-percentage point hike on Aug. 4. It said in June that it was ready to act "forcefully" if needed.

Asked at an event hosted by OMFIF, a think-tank, about the risks to the central bank's independence, Bailey said the BoE would bring inflation back to target, "no ifs or buts".

Earlier, in a speech, Bailey reiterated that the BoE would "if necessary act forcefully in response" to signs of persistent inflation pressure.

This language was meant to make clear that "there are more options on the table than just another 25 basis points", he added.

Bailey used his speech on Tuesday to focus mostly on longer-term questions facing Britain and the global economy. He said his comments did not represent a signal about the BoE's next moves.

On Monday, Bailey told lawmakers that he still expected inflation would fall sharply next year and there was "a range of things" on the table for the MPC at its next scheduled meeting in early August.

Bailey also said on Tuesday that the BoE would set out more plans on Aug. 4 for reversing quantitative easing, reiterating that sales would be gradual and would not be made into distressed market conditions.

"We will have an overall target of reduction (from) active sales and run-off," he said.

The BoE, Bailey said, will detail a new open market facility to ensure liquidity once gilt sales reached a point closer to matching banks' underlying demand for central bank reserves.

(Reporting by David Milliken and William Schomberg; editing by Mark Heinrich)

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