"The Bank of England will, as always, take monetary policy decisions to ensure that the inflation target is met over the medium term"
However, speaking at Oesterreichische Nationalbank's Annual Economic Conference in Vienna, the governor said he rejected 'the argument that in [its] response to Covid the Bank’s Monetary Policy Committee let demand get out of hand and thus stoked inflation', adding that 'the facts simply do not support this'.
The Monetary Policy Committee recently voted to increase interest rates by 0.25%, to 1.0% - its fourth rise in a row from a historic low of 0.10% in March 2020.
Bailey said that the job of monetary policymakers was not to 'anticipate and stop the effects on inflation of shocks' such as the invasion of Ukraine or Covid-19, but to respond when they happen, adding:
"It is domestic actions that have to get us back to price stability. For monetary policy, the choice of policy actions is influenced by the nature of the shock we are facing."
"In the UK we are facing a very big negative impact on real incomes caused by the rise in prices of things we import, notably energy. We expect that to weigh heavily on demand. We judge the appropriate degree of monetary tightening taking that into account."
He went on to explain that UK GDP in March was just 0.6% above its pre-Covid level, and is 'substantially below the path it was expected to follow pre-Covid'.
He concluded:
"What we do have is a very tight labour market. But that does not look like a story about rapid demand growth. The labour force has shrunk by around 1% since the onset of Covid. It looks much more like an impact from the supply of labour."
"The job of the Bank of England is to return inflation to target at a time when a very large headwind from external shocks, and an internal shock from a fall in the labour force, are reducing real incomes but risk leading to persistence in domestic wage and price setting, so-called second round effects."
"The Bank of England will, as always, take monetary policy decisions to ensure that the inflation target is met over the medium term. We have raised the official rate four times so far and have made clear that in order to bring inflation down to target we are prepared to do so again based on the assessment at each of our meetings."
