The Bank of England (BoE) believes that inflation has “turned the corner” and is on its way down in relief for families as governor Andrew Bailey gave his clearest admission yet that the Bank was slow to act on inflation.
However, Bailey also said further monetary tightening would be needed if inflation persists, meaning interest rates can still go up.
Inflation dropped to 10.1% in March, having hit 11.1% last October, much higher than the BoE’s 2% target.
Questioned by the Treasury select committee, Bailey acknowledged that inflation had already been on the rise before Russia's invasion of Ukraine.
Bailey told MPs on the Treasury Committee on Tuesday that the BoE expected the labour market to weaken at the end of 2021 when the furlough scheme, pushing up unemployment and easing inflationary pressure.
He told MPs: "We hold our hand up and say that's a judgment we had to make and it didn't turn out right."
The governor also said that he stands by the view that inflation has “turned the corner” and that the central bank had “very big lessons to learn” as inflation hit a double-digit record high.
"I think there are very big lessons about how we operate monetary policy in the face of very big shocks," Bailey said.
Bailey said food producers may also have locked in higher costs than the BoE had anticipated, something that he said should have been picked up by the central bank.
The Bank's chief economist Huw Pill said there were questions over whether policymakers' modelling needed to change given the unexpected persistence of inflation in the aftermath of a series of shocks, from COVID to the energy-price crisis.
“We recognise that our forecast for inflation have been too low, and we’re trying to understand why we have made those errors, interpret those errors in terms of behaviour, and make an assessment if that behaviour will continue or not,” Pill said.
Conservative MP John Baron said the BoE’s failure to keep inflation close to its 2% target was a “woeful neglect of duty”.
“Why should the public have confidence in your ability to get it right going forward, and what will you do differently?” he asked the governor.
The BoE increased interest rates for the 12th time in a row earlier in May to its highest level in 15 years to 4.5%.