Bank of England Governor Andrew Bailey has urged governments to contribute to price stability and market confidence through disinflationary tax and spending policies. Speaking at the Istanbul Economic Forum, Bailey emphasised the need for governments to consider how their spending and borrowing affect inflation.
Bailey, who also chairs the Financial Stability Board, stated that governments should make decisions that demonstrate a commitment to both price and financial stability. He added that fiscal policy must be credible and seen as such by markets, particularly during periods of negative shocks like a major conflict in the Middle East.
The Bank of England is mandated to maintain CPI inflation at two per cent. UK inflation for the 12 months to August was 3.1 per cent, and the Bank anticipates it will exceed four per cent in the coming months due to high global energy prices. Brent crude, an energy cost benchmark, rose from $90 to over $100 a barrel in the last month.
Bailey warned that if energy prices remain high for an extended period, it becomes more difficult for the Bank to view the situation as temporary. He noted that if households and firms begin to incorporate this shock into their wage and price setting, the temporary effect could become persistent. The Bank is widely expected to increase interest rates to four per cent at its next meeting, a week after the Budget.
The 10-year gilt yield, which indicates UK government borrowing costs, has climbed from around 4.2 per cent in March to nearly 5.5 per cent, increasing the government's debt interest payments.