Bailey warns of biggest interest rate hike in 27 years as he defends Bank independence

Bailey warns of biggest interest rate hike in 27 years as he defends Bank independence

Jhe Bank of England is set to unveil the biggest interest rate hike in nearly 30 years, Governor Andrew Bailey suggested as he hit back at a barrage of attacks from Tory leadership candidates .

Mr Bailey said rate setters had put a 50 basis point hike “on the table” for the next meeting in August, the strongest signal yet that the Bank will step up its efforts to make lower inflation from a 40-year high.

Last night the governor also launched a fierce defense of the Bank of England, warning that its independence is ‘now more important than ever’ following criticism from prime minister candidates.

The Bank’s Monetary Policy Committee has already voted five straight hikes after inflation hit a 40-year high of 9.1%, pushing the base rate from 0.1% to a post-financial crisis high 1.25%.

But Mr Bailey signaled the Bank could accelerate the pace of rate hikes by 25 basis points to 50 in what would be the biggest hike since 1995, before independence.

A jump of 50 basis points would add nearly £70 a month to the costs of a typical mortgage of £250,000 on the five-year average rate, according to data from Moneyfacts.

He said at the Mansion House Financial Services Dinner: ‘If we see signs of more persistent inflation, and price and wage fixing would be such signs, we will have to act forcefully. . In simple terms, this means that a 50 basis point increase will be among the choices on the table at our next meeting.

Mr Bailey said a bigger rate hike was “not locked in” as he admitted there were growing risks inflation could be even higher than expected.

Markets expect interest rates to reach nearly 3% by the end of 2022, raising mortgage costs for millions of homeowners and increasing borrowing costs for businesses.

The governor added that sales of government bonds to reverse quantitative easing could begin as early as September and said reductions in the amount of gilts held by the Bank could reach £100bn in the first year.

A number of Tory leadership challenges have attacked the Bank of England over soaring inflation as food and energy bills soar. Some have argued that his quantitative easing bond-buying blitz fueled inflation. Foreign Secretary Liz Truss, now the favorite to succeed Boris Johnson, has suggested she will review the Bank’s remit to ensure it is stringent enough.

Mr Bailey used the speech to defend the Bank and its remit in the wake of the attacks, saying ‘the Russian shock is now the biggest contributor to UK inflation in some way’.

He said: “These times are the greatest challenge to the inflation targeting monetary policy regime we have seen in the quarter century since the MPC was established in 1997.

“It absolutely does not mean that the regime has failed. Far from there. The diet was set up for times exactly like these. The regime, based on the independence of the central bank, is now more important than ever. The value of any diet is tested in the hard times, not in the good times.

At the same event at Mansion House, Nadhim Zahawi gave his first major speech as chancellor to promise he would reap the benefits of Brexit by repealing EU-era rules governing the services sector, including financial regulation controversial Solvency 2 for insurers.

He said: “The British people can rest assured that we are making progress and realizing the benefits of Brexit… [We] will trigger growth in our financial services sector and enable us to unlock tens of billions of pounds of investment into the UK economy.

Mr Zahawi also confirmed that a so-called “power of appeal”, which would allow ministers to overrule decisions of financial authorities if they threatened to delay reform, was “under consideration”.

It came as the Treasury published new plans to make it easier for UK-listed companies to raise funds, as part of wider reforms to boost the City of London post-Brexit.

A government-backed review led by Mark Austin, a partner at city law firm Freshfields, has proposed making it easier for companies to access investors to raise money by scrapping mostly expensive prospectuses secondary fundraisers.

Mr. Austin also recommended that retail investors, who have historically been excluded from many fundraising rounds, be involved in all fundraising rounds.

The reforms aim to energize the Square Mile and make the London Stock Exchange more attractive to fast-growing businesses.

The city watchdog backed the overhaul, saying Mr Austin’s recommendations were aligned with his ‘strategic priority to ensure UK wholesale markets continue to be seen as one of the world’s leading markets of choice for issuers, intermediaries and investors”.

The recommendations were also widely supported by shareholder groups and institutional investors such as BlackRock and Abrdn.

Mr Austin said: “The proposals announced today are designed to further improve the international competitiveness of UK capital markets and support the growth ambitions of companies already listed on these markets.”

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