BOE’s Bailey rejects calls to raise inflation target above 2%

BANK of England (BOE) governor Andrew Bailey rejected the need for an inflation target higher than 2 per cent, warning that changing the goal would “unpick expectations”.

He told a conference in Aix-en-Provence in France that the BOE has flexibility built into its remit that can give the central bank longer to bring price growth down but that it was “critical that flexibility isn’t confused with not pursuing 2 per cent”.

The BOE is grappling with inflation at 8.7 per cent, over four times its remit. It raised rates by a surprise half point to 5 per cent last month. Markets now expect it to increase them to 6.5 per cent to prevent a wage-price spiral.

Some economists have suggested raising the inflation target to 3 per cent to take immediate pressure off central banks and avert a rate-induced slump. If the BOE lifts its benchmark to 6.5 per cent, most economists believe a recession will be inevitable.

Bailey conceded that the problems were “more severe in the UK” than in Europe but insisted: “We will bring inflation back to target,” and that “we do have some flexibility about how quickly we bring it back to target”.

Bailey referred to the BOE’s leeway to lengthen its horizon to bring price growth down from the usual two years to three years if necessary.

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Meanwhile, France’s central bank head, Francois Villeroy de Galhau, also on Sunday (Jul 9) pushed back against a suggestion from some French economists to raise the European Central Bank’s (ECB) 2 per cent inflation target.

Villeroy, who sits on the ECB’s governing council, also said that ECB interest rate hikes were close to topping out and that rates would be kept at elevated levels sufficiently long enough for the impact to feed through the economy. BLOOMBERG, REUTERS