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Bank of England: Russia-Ukraine crisis could drive UK inflation higher

·Business Reporter, Yahoo Finance UK
·4-min read
Bank of England officials spoke to MPs at the Treasury Select Committee on Wednesday
Bank of England officials spoke to MPs at the Treasury Select Committee on Wednesday. Photo: Henry Nicholls/Reuters

The geopolitical crisis between Ukraine and Russia could drive UK inflation higher, a Bank of England (BoE) policymaker has warned.

Speaking to MPs at the Treasury Select Committee on Wednesday, Jonathan Haskel, external member of the Monetary Policy Committee (MPC), said the escalating conflict could drive up energy prices even further, adding to inflationary risks.

“If certain geopolitical events specifically affect the commodity supply chain, it could create substantial price volatility… there seems a material risk of further increases in global gas prices which would only add to the already considerable rises in CPI inflation we have seen so far."

Haskel, a professor of economics at Imperial College London, was one of four out of nine members who voted for an interest rate rise to 0.75% at the last meeting.

He was joined by the Bank’s governor Andrew Bailey, as well as deputy governor Ben Broadbent, and external member Silvana Tenreyro.

Haskel added that the Bank doesn’t want the “blip” of soaring gas and oil prices to become permanently embedded in inflation, while Broadbent said the increase in UK energy bills this year is twice as big as any single year in the 1970s.

Read more: What higher inflation means for savers and investors

It came as Bailey said during the meeting that the central bank will need to respond to second-round effects from higher inflation if they happen.

"It's not just wage setting, it's also price setting...it's both. There is very clearly an upside risk there. The upside risk...comes through from the second-round effects,” he said.

"The second-round effects are a real concern. If we get the second-round effects... of course we would need to react to that with higher interest rates... And the consequence of that, I have to point out, and I know I'm unpopular for saying these things, is that it would of course slow activity in the economy and it would increase unemployment".

The UK inflation rate rose by 5.5% in the 12 months to January, up from 5.4% in December 2021, reaching a near 30-year high.

This was ahead of the 5.4% figure that economists expected, adding to the current cost of living squeeze. The inflation rate is currently more than double the Bank of England’s 2% target.

Watch: How does inflation affect interest rates?

The central bank warned earlier this month that consumer price inflation could peak at about 7.25% by April when a 54% surge in energy bills is due to take effect, and the chancellor’s tax rises come into place. But the Bank has so-far underestimated the extent of inflation in previous forecasts.

UK inflation is still being dominated by energy prices, and the prices of a select number of goods, which were heavily affected by the pandemic.

Threadneedle Street is expected to raise interest rates in March, as well as several times this year. It will make its next monetary policy announcement on 17 March.

Current market pricing suggests interest rates will increase to 2% this year, the highest since before the global financial crisis. Markets have priced in a half-point increase at one of the next two meetings of the Monetary Policy Committee (MPC).

Read more: UK wage growth lags behind inflation as cost of living squeeze continues

Also on Wednesday, Bailey added that the Bank’s planned asset sales could be halted if there was too much volatility in markets. It is set to run down its £895bn bond purchase programme as part of a wider tightening of monetary policy.

Bailey said it would consider kicking off this process when rates hit 1%, but that this would only happen during "normal market conditions".

He also urged banks to exercise restraint when paying out bonuses. "Please reflect on the economic situation we are in," he said. "There is a very big shock coming from outside. This hits the least well off hardest."

The comments follow BoE’s Dave Ramsden pointing to more monetary tightening on Tuesday at a keynote speech at the National Farmers’ Union’s (NFU) annual conference in Birmingham

The deputy governor, who was one of four officials to vote for a larger 50 basis point interest rate rise this month, said he now sees a "modest" interest rate hike over the coming months as it responds to soaring UK inflation.

However, he added that the longer-term path was hard to predict because of heightened economic uncertainty, including the Russia-Ukraine conflict.

“Some further modest tightening in monetary policy is likely to be appropriate in the coming months,” he said. “The word ‘modest’ is significant here though – I do not envisage Bank Rate rising to anything like its pre-2007 level of 5% or above, let alone to the kind of levels we used to see before the monetary policy committee was formed in 1997.”

Watch: Will interest rates stay low forever?

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