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Ministers pile more pressure on Andrew Bailey over inflation mistakes

·3-min read
bank of england andrew bailey inflation
bank of england andrew bailey inflation

Kwasi Kwarteng has added to pressure on the Bank of England after one of his Cabinet colleagues questioned its right to remain independent.

Inflation is expected to rise as high as 9pc when figures for April are published on Wednesday, amid the worst cost-of-living crisis in a generation.

The Bank's failure to anticipate the surge in costs has infuriated ministers, with one telling The Telegraph: "It has one job to do - to keep inflation at around 2pc - and it's hard to remember the last time it achieved its target."

Mr Kwarteng, the Business Secretary, added on Sunday morning: "It is a matter of fact that when the Bank of England became independent in 1997 they had an inflation target, two per cent, that's true. And inflation is running almost into double digits now. So that is an issue, clearly."

Asked about the record of Andrew Bailey, the Bank's under-fire Governor, Mr Kwarteng said: "It is a very difficult time and I think he is doing a reasonable job. But it's true to say that that 2pc is part of their mandate, they have to keep it to 2pc - inflation."

Mr Bailey will face a grilling from MPs on the Treasury select committee on Monday, in what is likely to be one of the most intense sessions since the financial crisis.

The Bank has predicted inflation will surge above 10pc later this year, the highest level since 1981, despite previous assertions by Mr Bailey and other interest rate setters that elevated prices were merely “transitory”.

Some MPs have blamed “groupthink” in Threadneedle Street for the failure to predict persistent levels of high inflation.

One think tank has called for an official investigation into the Bank's poor forecasting record. The Centre for Economics and Business Research said: "The MPC is being forced to accept inflation five times its target rate. This will have long term consequences for its credibility."

Last summer, Mr Bailey and the Monetary Policy Committee (MPC) said inflation would likely “exceed 3pc for a temporary period”.

They said this was the product of economies reopening after Covid restrictions, as recovering supply chains struggled to keep up with exploding demand, but would not last and therefore did not require action at that point.

It was despite warnings from the Bank’s chief economist at the time, Andy Haldane, who said the economy was at risk of overheating.

He called for the quantitative easing programme to be reduced and warned that if inflation was allowed to get out of control it would require sudden and painful interest rate rises.

Mr Haldane left the Bank in June 2021 and is now chief executive of the Royal Society for Arts and an adviser to the Government on Boris Johnson’s levelling up plans.

The Bank subsequently hiked its inflation forecasts and raised interest rates four times, taking the base rate from 0.1pc in December to 1pc today.

One cabinet minister told The Telegraph that the handling of inflation had raised "fundamental questions" about The Old Lady’s future, while another said: "The Bank hasn't been getting things right for a long time.

"Haldane was a loss to them, and the fact he has turned out to be right should be a realisation that the Bank's groupthink is quite risky."

Liam Fox, the former defence secretary, also broke ranks to criticise Threadneedle Street, claiming the MPC had “persisted beyond any rational interpretation of the data to tell us that inflation was transient”.

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