Senior economists and an influential MP have demanded a major parliamentary inquiry into the Bank of England’s spectacular failure to predict soaring inflation. Bank Governor Andrew Bailey’s £575,000-ayear job could be on the line if he is found to have been ‘asleep at the wheel’ for not spotting the escalating cost-of-living crisis, one added.
Bailey has come under mounting pressure to explain why the Bank didn’t raise interest rates sooner and faster. That was despite warnings more than a year ago from the likes of former Governor Lord King that inflation – dormant for a decade – would roar back into life as the economy emerged from the pandemic.
Covid-related supply chain disruption and rocketing energy costs following Russia’s invasion of Ukraine have fuelled the fastest rise in prices in 40 years.
Pressure to quit: Bank of England governor Andrew Bailey has been criticised for failing to see the crisis coming
The increase in the cost of living, as measured by the Consumer Prices Index, has shot up to 9.1 per cent a year – way above the Bank’s official 2 per cent target.
Meanwhile, the rise in the previous measure of inflation, the Retail Price Index, is even higher at 11.7 per cent a year.
In response, the Bank’s rate-setting Monetary Policy Committee (MPC) has jacked up the cost of borrowing five times since December last year, from 0.1 per cent to 1.25 per cent. The City now expects the benchmark base rate to hit 3 per cent by the end of the year. But for many, that has come too late. Doug McWilliams, deputy chairman of the Centre for Economic and Business Research consultancy, said Parliament must now investigate why and how the Bank failed to see the crisis coming.
‘We need to find out why – when others haven’t been too far out in their inflation forecasts – it has been consistently so far behind the curve,’ he told The Mail on Sunday. He blames ‘the arrogance of official economic policymakers’ and ‘groupthink’ within the MPC.
‘I’m blue from trying to persuade the Treasury and Bank of England to listen to a wider selection of views. There’s diversity of everything except views,’ he said, adding Bailey should be asked to resign if the Bank was found ‘culpable’ for its inflation forecast failure. Kevin Hollinrake, a Conservative member of the parliamentary cross-party Treasury Select Committee, last night supported the call for an inquiry.
‘I’d be in favour of that,’ he said. ‘There are specific UK issues regarding inflation which we’ve raised with Andrew Bailey several times. We’ll want to have a more in-depth look when we have more facts but there’s mounting evidence the Bank was asleep at the wheel.’
Some want an inquiry to go even further. They include Gerard Lyons of wealth manager Netwealth – and a former economic adviser to Prime Minister Boris Johnson.
‘There needs to be a more forward-looking approach,’ Lyons said. ‘It would be more constructive to have an inquiry into whether there is a need for a new policy remit for the Bank, how its committees interact, its processes and policies.’
It is the latest blow for Bailey. Earlier this year, he was criticised for appearing to tell workers not to ask for too big a pay rise to help ease pressure on inflation. He was also criticised over a £50,000 rebrand for the Bank’s logo to remove the cross of St George.
The Bank said it was not alone in getting its forecasts wrong, adding that inflation ‘in the US and euro area had also been much higher than projected by their central banks at the start of 2021, as these economies were hit by similar global price shocks to the UK’.
But Julian Jessop, economics fellow at the Institute of Economic Affairs, said: ‘The Bank’s failure to predict that inflation would take off was a massive error, with huge costs to the economy and people’s wellbeing. Of course, the Bank was far from alone here.
‘But a parliamentary investigation would be another opportunity to explore specific problems in the UK, including the lack of attention to the monetary drivers of inflation.’
The Bank has warned that soaring inflation and higher-than-expected interest rates mean households face a record squeeze to living standards. That has also pushed up the interest bill on Britain’s £2.4trillion national debt pile, giving Chancellor Rishi Sunak a further headache as he tries to cut Government borrowing.
Last week, The Mail on Sunday revealed that despite the highest tax burden in 70 years, the total cost of servicing this debt was now expected to be more than £100billion this year. That compares with £83billion officially forecast as recently as March.
The taxpayer is now on the hook for an eye-watering £20billion of debt interest payments in June alone – equivalent to £667million a day or £28million an hour.
That astonishing figure is the highest ever monthly debt bill as June is traditionally the peak month for public borrowing.
Sunak has admitted that rising inflation and debt interest payments ‘pose a threat to the public finances, as they do for family budgets’. He added: ‘That is why we are taking a balanced approach – using our fiscal firepower to provide targeted help with the cost of living, while remaining on track to get debt down.’