The UK and the world face an “apocalyptic” risk of war in Ukraine sending global food prices skyrocketing, the Bank of England governor told MPs.
“Sorry to be apocalyptic for a moment, but this is a big issue,” Andrew Bailey said Monday, noting that wheat prices alone were up almost 25 percent in the last six weeks.
The central banker said his fears stemmed from talks with Ukrainian officials about the big grain and cooking oil producer’s ability to export goods. They needed support to “work out how to make it out of the country,” he said.
“And that’s a big, big concern and it’s not just, I have to tell you, a big concern for this country. There are also major concerns for developing countries. So if I kind of had to, sorry for being apocalyptic for a moment, but that’s a big problem.”
The warning comes as the UK is already in a “bad situation” with inflation, Mr Bailey said.
The cost of living has been pushed up by a variety of global factors that the bank’s rate-setters could not have foreseen, he added.
This includes not only the war in Ukraine and the recent response to a spate of Covid-19 infections in China that has included economically damaging, strict lockdowns. The result was a sharp and sudden rise in global energy prices, driving up the cost of living in Britain.
“I’m not at all happy about this, this is a bad situation,” Mr Bailey said, noting that inflation is expected to top 10 per cent later this year.
The central banker answered a question from Treasury Select Committee chairman Mel Stride MP whether he had been “sleeping at the wheel” when it came to rising interest rate pressures.
About 80 per cent of the forces driving up inflation in the UK came from global effects, Mr Bailey said. “There’s not much we can do about 80 percent of it,” he added, “we have to face the reality of the situation we’re facing.”
Another factor that accounted for part of the remaining 20 percent of price growth was a smaller post-pandemic labor force.
“The extent and duration of the fall was very unusual,” Mr Bailey said, adding: “These are very fine and quite harsh judgments, I must say.”
Mr Bailey’s comments followed criticism attributed to UK Cabinet ministers in a Daily Telegraph News report on Saturday.
Inflation, the price growth rate of the economy, is at 7 percent and the BoE forecasts it could reach 10 percent this year. This compares to the central bank’s 2 percent target, which forms a key part of its mandate and is often referred to as price stability.
A senior minister said of the BoE: “It has a job to do – to keep inflation around 2% – and it’s hard to remember the last time it hit its target.”
A second added that senior figures are “now questioning their independence”, suggesting greater political influence over the bank, which was made independent by Gordon Brown in a move announced immediately after he took office in 1997 .
However, given signs of weakening consumer confidence, the BoE may need to balance the need to contain inflation with the need to avoid a recession. Because higher interest rates can often act as a handbrake on economic growth.
The BoE warned that severe pressure on household living standards earlier this month was likely to trigger a sharp economic slowdown.
Ahead of the Evidence Session, Ed Smith, co-chief investment officer at Rathbone Investment Management, said the UK’s prospects for a recession were worse than other major economies. As a result, the BoE may be more likely than international counterparts, including the US Federal Reserve, to “stop tightening sooner than investors expect.”
“Changes in government spending and taxation are a bigger headwind in the UK than in the US. Meanwhile, pressures on the cost of living in the UK appear to be more intense and UK households have not saved to the same extent during the acute phase of the pandemic,” he said.
“Consumer confidence in the UK has also slumped lately and there have been some worrying signs of weakness in consumer-related data such as retail sales and new car registrations,” added Mr Smith.