Bank of England Governor Andrew Bailey has warned that the shock to real incomes from rising energy prices will be worse than those seen in the 1970s.
Speaking at an event organised by Brussels-based economic think tank Bruegel, Bailey said: “In the UK and elsewhere, we are facing a very large shock to aggregate income and spending.”
“This really is a historic shock to real incomes. The shock from energy prices this year will be larger than every single year in the 1970s.”
Oil and gas prices were already rising steeply before Russia invaded Ukraine, causing them to surge even higher. Oil now trading at well over $100 a barrel, while inflation is now at 6.2% – a 30-year high.
In response, the Bank of England has lifted interest rates three times since December, to 0.75%, as it looks to contain inflation without dampening economic growth.
Bailey told the think tank that the BoE had already started to see evidence of a slowdown in economic growth, and acknowledged that inflation “hurts the least well off the hardest”.
Asked about further interest rate rises, he said the BoE had “softened its language” to reflect the uncertain environment following the invasion of Ukraine. But he added: “Unfortunately, there is more to come on inflation shock.”
Bailey also told the event that recent huge swings in commodity prices meant resilience in financial markets could not be taken for granted.
“Liquidity conditions have deteriorated in many commodity markets, margining costs have risen, which is of course a reflection of much higher volatility and risks in these markets,” he noted.
“We can’t take resilience, in particular in that part of market, for granted. There is a strong need to work together on this.”
His comments echoed those from the European Central Bank, which last week said it would need to keep a close eye on commodity derivatives markets because of heightened price volatility.