UK chancellor Jeremy Hunt has said that the Bank of England should remain focused on taming “dangerously high” inflation, despite the strain placed on the global banking sector by rising interest rates.
Data to be published on Wednesday is expected to show UK inflation at close to 10 per cent, and Hunt on Tuesday said he had told BoE governor Andrew Bailey to do “what you think is necessary” to bring down prices.
Asked whether fighting inflation was still the priority at a time of banking stress linked to higher interest rates, Hunt told the House of Lords economic affairs committee: “Yes it is. The prime minister’s first priority is to halve inflation.”
Investors have bet that the US Federal Reserve will be constrained in its ability to raise interest rates by fragility in the banking sector, but Hunt took a hawkish stance in evidence to the cross-party group of peers.
He confirmed that he had discussed with Bailey the impact of higher interest rates on the banking sector but said taming inflation — which he described as “dangerously high” — was key. “We need to do everything we can to maintain our focus on bringing it down,” he said.
“I only ever say to him: “Please do what you think is necessary — as indeed you are legally bound to do under the Bank of England Act,” added Hunt.
Hunt accepted that the speed of recent interest rate rises was “the root cause of the volatility we have seen in recent months” and said it was important to fight inflation “in a way that maintains as best we are able stability in financial markets”.
But he added: “Inflation is itself destabilising. It’s not an answer to say we are suddenly going to change our minds and says it’s acceptable to have a rate of inflation that is as destabilisingly high as 10 per cent.”
The BoE’s Monetary Policy Committee will set interest rates on Thursday, just 24 hours after the latest data on inflation, with a consensus view among economists that it could nudge just below 10 per cent.
Bigger falls in inflation are expected to follow in the next few months as last year’s surge in energy costs comes out of the year-on-year comparisons. But Hunt said that roughly 6.5 percentage points of the inflation number comprised “core inflation”, driven by non-energy factors such as pay rises.
Lord Macpherson, former permanent secretary to the Treasury, said the BoE should focus relentlessly on curbing inflation. “The BoE mustn’t subordinate its monetary to its financial stability objective,” he told the Financial Times. “Otherwise inflation will remain higher for longer, as in the end will interest rates.”
Meanwhile Hunt defended his planned City of London regulatory reforms, promising that he would not do anything to undermine financial stability. “We won’t unlearn the lessons of the financial crisis,” he said.
The chancellor also defended the Swiss government’s handling of the $3.2bn rescue-takeover of Credit Suisse by UBS, which wiped out $17bn of its bonds, upending the normal “hierarchy of claims” for investors.
Hunt said compromise had been needed to complete the sale, which represented “the best possible outcome”.
“I wholly support the decisions made by the Swiss authorities that made the purchase by UBS possible. In the circumstances, I think they took the right decision,” he said.
Hunt added that he had been assured by the BoE that the UK banking system was “immensely stronger” than it had been before the 2008 crash, but cautioned: “We have to remain vigilant.”