Bank of England criticised for not acting sooner to tame double-digit inflation

Governor of the Bank of England Andrew Bailey
Bank of England governor Andrew Bailey. The BoE was criticised by MPs over inflation response at a select committee session on Thursday. Photo: Frank Augstein/Reuters

The Bank of England has been accused of not acting soon enough to tame soaring high inflation as the cost of living continues to squeeze UK households.

Conservative MP John Baron told officials from the Bank of England during a Treasury select committee on Thursday that people were struggling inflation, which has been above the Bank of England’s 2% target since May 2021 despite the increase in interest rates.

“People are struggling now with trying to catch up with inflation,” Baron said.

“If central banks generally had been more proactive, there might be less pain out there for people,” he added.

It is not the first time Threadneedle Street has been accused of being too slow to act.

Read more: Bank of England ready to raise interest rates again warns Andrew Bailey

Its own Monetary Policy Committee (MPC) rate-setter member Chaterine Mann has said that the Bank of England was too slow at raising interest rates and is now paying the price.

The rate of inflation for the 12 months to March this year was 10.1%, up on the 9.9% forecasted by the Bank of England.

Ben Broadbent, deputy governor for monetary policy at the Bank, highlighted to MPs the difference between saying the BoE had been late in responding to the events that caused inflation and saying it caused inflation.

But MPs did not appear to be convinced as Barton said the central bank needs to be ready to act swiftly to unexpected events.

“I accept you cannot predict shocks. They happen. But you have to respond appropriately,” Barton said.

The governor of the Bank of England denied there was a link between recent quantitative tightening – which saw the central bank reduce its stock of government bonds – and record high inflation.

Andrew Bailey told the Treasury Committee that the UK has not seen a strong recovery in demand since the pandemic, which indicates that QE is not the cause of inflation.

Read more: Over 10 million Brits struggling with bills and credit repayments

Broadbent suggested that market data indicates that the QE conducted in June and November 2021 may have added half a percentage point to UK inflation.

“The idea that this is the cause of double-digit [inflation] is not well-supported” he said.

Bank of England deputy governor Dave Ramsden said on Thursday that the rate at which the central bank reduces its holdings of government bonds was more likely to increase than decrease, as it unwinds its quantitative easing programme.

The BoE is currently reducing its government bond holdings by £80bn per year, after buying £875bn of gilts to stimulate the economy between 2009 and 2021. The BoE's Monetary Policy Committee will review the pace of this reduction in September.

"There's potential for us to go up a little bit. I don't see us going down given the experience of the first year (of quantitative tightening)," Ramsden, who oversees the BoE's balance sheet, told the Treasury committee.

The BoE top brass was confronted about the risks of quantitative tightening, with MPS asking if it was similar to decommissioning a nuclear submarine, meaning it has to be done extremely carefully because the potential for things to go wrong is enormous.

Deputy governor Broadbent agreed that there are risks, but disputed the "nuclear submarine decommissioning" angle, comparing the bond-buying programme to mountaineering.

"You have to be careful going back down the other side. Because you want to be in a position that you can climb another mountain afterwards, if you have to. So you always have to be very careful on the descent," he said.

A lot of accidents happen on the descent of mountains, Ramsden pointed to MPs.

Watch: How does inflation affect interest rates?

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