LONDON (Reuters) -Bank of England Governor Andrew Bailey said on Tuesday the central bank had “very big lessons to learn”, with inflation still in double digits and food prices rising at the fastest rate since the 1970s.
“I think there are very big lessons about how we operate monetary policy in the face of very big shocks,” Bailey told lawmakers in a question-and-answer session dominated by questions about the BoE’s failure to forecast the scale of inflation’s jump.
Britain’s inflation rate in March was the highest in Western Europe at 10.1%, putting the central bank under intense political scrutiny. Critics have accused the BoE of not only being slow to react, but also out of touch with struggling households.
The BoE has raised interest rates repeatedly since December 2021, from 0.1% to 4.5% today. Financial markets fully price in further increases to 5% by the end of 2023.
Harriet Baldwin, chair of parliament’s Treasury Committee, told Bailey that the central bank had been too slow to pick up on the warnings of food producers that costs were rising sharply – something now evident in inflation data.
“Something has really gone wrong with your modelling and your network of agents which is meant to give you this edge in terms of information,” Baldwin said.
Bailey said the BoE’s market contacts were told in February that food inflation had likely peaked, which had turned out not to be true, with weather events in other parts of the world affecting crops like sugar.
He said food producers may also have locked in higher costs than the BoE had anticipated, something he said should have been picked up by the central bank.
Earlier on Tuesday, the Office for National Statistics said British food inflation – at 19.1% in March – was the second-highest among Group of Seven countries, behind only Germany.
Last month, union bosses and tabloid newspapers criticised BoE chief economist Huw Pill for saying that the country needed to accept it was poorer because of shocks like the energy price surge sparked by Russia’s invasion of Ukraine.
Earlier this month, Bailey said Pill’s wording was wrong.
“We do have a challenge – I will be honest with you – in how we communicate,” Bailey said of the BoE’s attempts to convey the outlook for interest rates.
In his annual report to parliament, Bailey repeated the BoE’s existing language that further interest rate increases would be required if evidence of more persistent inflation pressures appeared.
(Reporting by William Schomberg, Suban Abdulla and Andy BruceEditing by Christina Fincher)