The Bank of England warned of higher-than-expected interest rate hikes next month.
Speaking in Washington this afternoon, Bank of England Governor Andrew Bailey said, “As things stand today, my best guess is that inflationary pressures will require a stronger response than perhaps we thought in August.”
He added that the Bank “will not hesitate to raise interest rates to curb inflation”.
The Bank will announce its next interest rate decision on November 3rd and many investors think it will raise them from the current level of 2.25% to 3% or possibly 3.25%, both of which are much bigger than usual moves. .
The Bank had previously predicted that the inflation rate would peak at 11% in October.
Speaking at the event, Bailey, referring to the market turmoil following the government mini-budget, added: “The UK financial markets have been in violent moves in recent weeks, particularly in the long end of the public debt market.
“This has exposed the flaws in the strategy and structure of an important part of many pension funds. The Bank of England has had to step in to address a threat to the stability of the financial system, our other main focus.
“It might appear that there is a tension here between monetary policy tightening as we must, including so-called quantitative tightening, and buying public debt to alleviate a critical threat to financial stability.
“This explains why we have been clear that our interventions on this last point are strictly temporary and have been designed to do as little as possible or necessary.”
It comes as Liz Truss’ new chancellor Jeremy Hunt said taxes would rise and warned of “tough” spending cuts in sight, in a stunning series of interviews just hours after taking office.
He also refused to commit to the prime minister’s promised 1-cent income tax cut and to increase defense spending to 3% as he admitted “mistakes” were made in last month’s mini-budget.
And he suggested that the planned 1-cent cut in income tax could be dumped. He was “very hopeful” that the government could stick to the measure, he said, but he wouldn’t make a decision until he’d looked into everything in the round.
He also seemed to reject Ms. Truss’s pledge to increase defense spending to 3%, saying it would depend on the state of the economy.
He refused to go into tax detail or commit to benefits that grew in line with inflation, even though he repeatedly claimed that his was a “compassionate conservative government.”
Mr. Bailey’s comments come after the Bank confirmed the end of its emergency bond purchase program. The Bank said other measures will come into effect after 14 October “to ease liquidity pressures on LDI (liability-driven investments)”.
The Bank of England struggled to reassure investors after unveiling further measures to calm markets shaken by the UK government’s recent tax cut.
“We think the rebalancing needs to be done and my message to the funds involved and to all companies involved in managing those funds: you have three days left,” Bailey said before the intervention ended.
“You have to do it,” he said in an appearance at the Institute of International Finance in Washington.