Inflation could fall 'rapidly' as energy prices drop, says Bank of England governor

There could be a “rapid” fall in inflation in Britain amid a drop in global energy prices over recent weeks, the governor of Bank of England said on Monday (16), with a warning that a shortage of workers could still pose major risks amid the cost-of-living crisis.

Andrew Bailey told MPs on the Commons Treasury committee that the UK’s rate of inflation could fall back substantially this year after hitting the highest levels since the early 1980s during the autumn after Russia’s invasion in Ukraine led to an increase in wholesale energy costs.

“The biggest single reason inflation has risen to that level is the war in Ukraine. It is also the most likely reason that we’re going to see a rapid fall in inflation in the year ahead, because we are not seeing energy prices rising further. In fact, they’re coming down,” he said.

Answering questions from MPs on the stability of the UK’s financial system, Bailey said a risk premium on UK assets seen in the wake of former prime minister Liz Truss’s mini budget in September was now “pretty much gone”, although cautioned that confidence in the UK remained fragile.

“It’s going to take some time to convince people that we’re back to normal,” he said.

The headline rate of annual inflation as measured by the consumer prices index fell back to 10.7 per cent in November from a 41-year high of 11.1 per cent a month earlier.

Bailey's comments come as the Bank considers raising interest rates for the 10th time in a row early next month, with City investors anticipating a further increase from the current base rate of 3.5 per cent as it looks to weigh up the risk of a recession with the need to combat inflation.

Rishi Sunak has also pledged to halve the inflation rate this year. Forecasts made in November by the Office for Budget Responsibility, the Treasury watchdog, suggest inflation is on track to drop below four per cent by the end of the year.