Bank of England accepts 'strong' case for interest rate rise

Governor delivers speech amid warnings of higher inflation over the medium term

The Bank of England warned that inflation pressures could lead to a rise in interest rates. Reuters

Bank of England Governor Andrew Bailey has acknowledged a growing case to raise interest rates but he said too much tightening of monetary policy could harm Britain's economic recovery.

The country has bounced back sharply from its nearly 10 per cent crash in 2020, caused by the coronavirus and the subsequent shutdown of much of the economy but Mr Bailey on Monday said a "modest" approach was appropriate.

"All of us believe that there will need to be some modest tightening of policy to be consistent with meeting the inflation target sustainably over the medium term," Mr Bailey in a virtual speech.

"Recent evidence appears to have strengthened that case but there remain substantial uncertainties and we are monitoring the situation closely."

Last week, the BoE said the case for higher interest rates appeared to have strengthened. It also nudged up its forecast for inflation at the end of the year to more than 4 per cent, more than twice its target rate.

The BoE said it expected the overshoot to be temporary, but two policymakers called for an immediate halt to its £895 billion ($1.23 trillion) bond purchase programme, which is due to run until the end of this year.

All of us believe that there will need to be some modest tightening of policy

Bank of England Governor Andrew Bailey

Mr Bailey said one major challenge would be to distinguish between one-off increases in price levels and factors that could cause a longer-term increase in the annual rate of inflation.

"Monetary policy should not respond to supply shocks, which do not become generalised through their impact on inflation expectations," he said.