Raised interest rates are a temporary measure, and low interest rates will return once inflation falls, the Governor of the Bank of England, Andrew Bailey, has said.
In a speech to the Official Monetary and Financial Institutions Forum, Bailey said, “Cyclical adjustments in short-term nominal interest rates – like those we are currently witnessing in the United Kingdom and abroad – will for the foreseeable future continue to be played out against the backdrop of low global equilibrium real interest rates.”
Inflation in Britain is at 9.1%, its highest level in the last 40 years.
Inflation is expected to touch 11% in the coming months, sparked by global factors such as rising energy prices as a result of the war in Ukraine.
But Bailey believes the underlying factors which have kept interest rates low – such as increased lifespans leading people to save more for their retirements – will “persist”, he said.
The BoE is under pressure to keep inflation under control.
In June 2022, it increased its rates from 1% to 1.25%. This was the fifth consecutive hike since December 2021. Some City observers expect the rate to hit 2.5% before the end of the year.
The BoE aims at bringing inflation down to 2% in around two years. Mr. Bailey said that policymakers are prepared to take whatever steps are necessary to bring inflation back to target.
Bailey also spoke about the long-term impacts of the COVID-19 pandemic, saying, “It is too soon to tell what the long-run impact of the pandemic will be for the economy.”
“It is worth bearing in mind that, while the pandemic was a large and unprecedented economic shock, with profound changes to labour markets and the way we work, it is possible that its long-run effects on productivity will be small.”
