Bank of England governor says it’s not to blame for runaway inflation

The Governor of the Bank of England rejected comments by predecessor Lord Mervyn King that the regulator's actions during the pandemic helped to push inflation to 40-year highs.

Andrew Bailey said the reduction of the UK’s workforce was much more likely to be responsible for high inflation.

“What I reject is the argument that in our response to Covid the bank’s Monetary Policy Committee let demand get out of hand and thus stoked inflation,” he said in Vienna at an event hosted by the Austrian Central Bank.

“The facts simply do not support this.”

He said that gross domestic product was only a little higher than it was before Covid and would probably have been substantially higher if the pandemic had not happened.

“What we do have is a very tight labour market," Mr Bailey said. "But that does not look like a story about rapid demand growth.

“The labour force has shrunk by around 1 per cent since the onset of Covid. It looks much more like an impact from the supply of labour.”

Last week Mr King, who was the bank’s governor in 2008 when financial markets crashed, criticised the policy of the institution during the pandemic.

He said the bank printed more money, in "quantitative easing", at the same time as manufacturers, restaurants and other service companies closed.

This meant that there was more money in the economy, but less to spend it on, which pushed up prices.

His criticism was not limited to Mr Bailey and his team. Mr King said that it was a common feature of all central banks.

“They basically felt: ‘We must demonstrate that we’re here, we must do something’,” he told Sky News.

“But governments were doing a great deal, though in our case the furlough scheme, which was very sensible … it didn’t need central banks to print lots of extra money on top of all that.

“That’s generated a rise in inflation.”

On Monday, Mr Bailey again hinted that the bank could lift interest rates further to help battle runaway inflation.

“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,” he said.

The bank’s decision-making committee set the base rate to 1 per cent this month, its highest point since 2009.

Inflation hit 9 per cent in the year to April as measured by the Consumer Prices Index.

It is the highest since records began and is thought to be higher than at any point since 1982.