The Governor of the Bank of England has defended his decision to keep interest rates at record lows despite inflation rising.
Speaking to BBC Radio 4’s Today programme, Andrew Bailey said interest rates will rise but only when there were signs of demand and wages rising, rather than sky-high prices for global commodities such as computer chips and gas.
He also said the Bank would seek more data on the end of the furlough scheme before making any decision.
On Thursday the Bank surprised some by holding interest rates at 0.1% despite warning inflation could hit as high as 5%.
The Bank’s remit is to keep inflation at between 2% and 3%.
He said: “We expect interest rates to rise and we are very clear.
“If you ask the question ‘why haven’t you done it now?’, the answer is all to do with the labour market… there were a lot more people using the furlough scheme right up to the end.
“The labour market looks tight in this country at the moment but the missing piece of evidence is just what has happened after the end of the furlough scheme and we don’t have any data to guide us on that.”
Asked whether interest rates will rise as high as 1%, Mr Bailey told the Today programme that when rates rise that would be more likely than a return to pre-financial crisis levels of 4% or 5%.
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He added: “We do think interest rates will need to rise but we don’t put a number on it… I’m not going to endorse 1%… I think it’s correct to think in those terms because what it means is the world of low interest rates we’ve been in since the financial crisis… we’re not going back there.”
The Governor added that the Bank’s remit is to keep inflation low but the current high prices are outside of its control.
He explained: “Raising interest rates won’t produce more gas, it won’t produce more semi-conductor chips.
“Where we have to use interest rates is where we see the potential for demand to rise or the potential for wage pressures to come into play, which can be self-perpetuating and we will do that.”
He said: “Inflation is clearly something that bites on people’s household income and they will feel that.
“I’m sure they already feel that in terms of prices going up and I’m very sorry that’s happening… we want to see the causes of inflation, which are to a considerable degree global and supply issues, tackled as soon as possible so we can get to a world where inflation is stable and down at the target… we’re not going back to the 70s. That was a very different era.”