Rishi Sunak did his best to sound reassuring after the Bank of England hiked interest rates to 5 per cent and sent a chill through a country already facing rising mortgage costs and serious cost of living pressures.
Vowing to work with the BoE to “root out inflation”, the prime minister on Thursday backed Andrew Bailey, the central bank’s embattled governor, adding: “These things are tough and require difficult decisions.”
“I’m totally, 100 per cent on it,” he told a press conference at an Ikea distribution centre in Kent. “It’s going to be OK and we are going to get through it.”
Seldom have the decisions taken at Threadneedle Street had such a direct bearing on the potential outcome of a future general election. Sunak is expected to go to the country in the summer or autumn of 2024.
One of the prime minister’s five pledges is to halve inflation to 5.4 per cent by the end of the year, tying his fortunes even more closely to decisions taken by the BoE’s monetary policy committee.
On three separate occasions on Thursday, Sunak’s spokesperson declined to say Bailey was doing a good job, but said: “He continues to have the prime minister’s support.”
Some Conservative MPs have criticised the central bank governor for failing to get a grip on inflation earlier, an alleged tardiness that some Tories believe could cost them their seats and potentially next year’s election.
Sir Jake Berry, a former Tory party chair, has accused the BoE of being “asleep at the wheel” and has warned that a “mortgage bomb” is primed to explode the finances of many households.
Andrea Leadsom, former Tory business secretary, has said the BoE has done “too little, too late” to tame inflation, while Jacob Rees-Mogg, another former cabinet minister said the central bank had “failed” on inflation.
However both Sunak and chancellor Jeremy Hunt remain publicly and privately supportive of Bailey, conscious of the potential damage to market confidence if any rift was seen to open up.
Hunt has told colleagues he is “100 per cent supportive” of Bailey and that the best thing the government can do in such tough times is “to do no harm” when it comes to fiscal policy.
“Jeremy and Rishi are clear — we will back the bank, said one senior Tory. “They will do what it takes to make their job easier not harder. It’s a bigger challenge than we expected but sound money is a basic Tory tenet.”
The Conservatives have had first-hand experience of how the markets can be spooked when politicians challenge the BoE’s independence. Liz Truss in her 2022 leadership campaign talked about changing the Bank’s mandate.
Truss’s supporters criticised Bailey for failing to tighten monetary policy to counter inflation, while at the same time backing a £45bn fiscal loosening in her disastrous “mini” Budget last September.
Senior Tories reject out of hand any suggestion the government might remove the governor and on Thursday Hunt expressed his “full support” for Bailey after he raised rates to 5 per cent.
“Businesses and households should have confidence that the government and the Bank of England understand the challenges they face from rising prices, and be in no doubt that we will act together to bring inflation under control,” said Hunt.
Sunak argues that economic growth must be founded on low inflation. He acknowledged on Thursday that the tax cuts demanded by many Tory MPs ahead of the election would be hard to justify until prices came under control.
While the opposition Labour party says it would be more attentive to the problems facing households through higher mortgage bills, it has not proposed any fiscal intervention to soften the pain.
Sunak has also ruled this out and has tried to switch the focus on to whether other economic actors — notably banks and supermarkets — are treating struggling households fairly.
Hunt will meet mortgage lenders on Friday to urge them to “live up to their responsibilities”, while Sunak reopened a familiar, tabloid-friendly critique that supermarkets might be ripping off their customers.
“We’re looking at the supermarkets making sure that they’re behaving responsibly and fairly when it comes to pricing all those products, to make sure that it eases the burden on your weekly shop,” he said.
Source: Economy - ft.com
