- Written by Darshini David & Sam Gruett
- BBC News Chief Economics Correspondent and Business Correspondent
The Bank of England governor has warned that Britain’s inflation rate may not fall as quickly as some expect.
Andrew Bailey told MPs that central bank policymakers were concerned that prices would continue to rise at a faster pace than financial markets expected.
He told the Treasury Committee that the central bank was concerned about the “likely persistence” of inflation.
Inflation fell to 4.6% in October from 6.7% in September, official figures showed.
Following this decline, as measured by the Consumer Price Index (CPI), the government claimed to have achieved its inflation target early, pledging to bring inflation to below 5.4% by the end of the year.
Mr Bailey told the Treasury Committee that while the rapid fall in inflation was good news, it could take time to reach the central bank’s 2% target.
“We’re concerned about the possibility of sustained inflation as we move the rest of the way to 2%, but I think the market is underestimating that,” he said.
As of September, the central bank had raised interest rates 14 times in a row in a bid to curb soaring inflation that is putting pressure on household budgets.
However, in the past two meetings, the policy rate remained unchanged at 5.25%.
“It’s too early to think about cutting rates,” Bailey said on Monday.
Official figures released early on Tuesday showed government borrowing (the difference between spending and tax receipts) was higher than expected at £14.9bn in October, boosted mainly by higher benefit payments.
However, data from the Office for National Statistics (ONS) also showed that the budget deficit in the first half of the financial year was smaller than expected, supported by higher wages and higher tax revenues reflecting inflation.
The ONS said the government had borrowed a total of £98.3bn since the start of the financial year. This was an increase of £21.9 billion on the same month last year, but lower than the £115.2 billion predicted in March by the UK’s independent financial watchdog, the Office for Budget Responsibility (OBR).
The fiscal health figures are mixed news for the chancellor as he puts the final touches on his autumn statement on Wednesday, and a reminder that he may not yet opt for deep tax cuts for households.
Some economists believe the chancellor will adhere to self-imposed restrictions on borrowing with around £20bn of breathing room, raising expectations of a tax cut.
Following the latest borrowing figures, Chancellor of the Exchequer Jeremy Hunt said the Bank of England would continue to support the Bank of England in its efforts to bring inflation down to 2%.
“It means being responsible for the country’s finances,” he added.
Ruth Gregory of Capital Economics said: “As the election approaches, the prime minister may be less tempted to reveal pre-election issues.”
But even if there is a big move before the election in 2024, she added, “there will almost certainly be a big tax increase in 2025 after the election.”
Sir John Gieb, former deputy governor for financial stability at the Bank of England, said the government’s finances had improved with higher wages and higher inflation, and income tax and value-added tax revenues had increased.
“He hasn’t raised the tax threshold. [on income tax]. The question is whether he should give any of this back,” he asked.
But some expect the focus of Wednesday’s statement to be on support for businesses, with households likely having to wait until next spring to announce any real benefits.
Responding to the ONS data, Samuel Tombs, UK chief economist at Pantheon Macroeconomics, said the statistics were a “timely reminder that the task of getting public finances back on a sustainable footing is far from complete.” said.
He also predicted that most of the tax cuts announced in the Autumn Statement would likely not come into force until after the next general election.