Speaking at a conference in late May, Bailey said the MPC had already effectively tightened monetary conditions by removing market expectations for rate cuts, and that the Bank was prepared to tolerate a period of above-target inflation rather than risk further damage to an economy already feeling the strain of higher energy costs, weaker consumer spending, and a softening labour market.
“Given the context of softness in the real economy and uncertainty around the scale and duration of the shock, tolerating temporarily above target inflation to provide some support for the real economy is an appropriate way to approach the trade-off,” he said. “But that tolerance would weaken if signs of second-round effects begin to emerge.”
Division within the MPC
The June vote exposed a widening rift among rate-setters. Chief economist Huw Pill, who voted for an increase at both the April and June meetings, has said interest rates will need to rise to keep inflation under control. “I am concerned that we’ve been running the economy a little bit hotter than the supply side,” he said. At the June meeting, Pill called for “prompt but modest action.”
External member Megan Greene also voted for a hike in June, advocating a “risk management strategy” in light of current economic conditions. Greene had previously indicated a more cautious stance.
MPC member Alan Taylor has taken a different view, saying rates at their current level are already acting as a restraint on the economy and that he sees no case for tightening further. “I feel comfortable where we are unless we get the worst-case scenario,” he said.