Bank of England governor says food price freezes are ‘unsustainable’
Potential supermarket price controls are “unsustainable” in the long term, the governor of the Bank of England has warned.
Interest rates in Britain may have fallen twice this year and inflation may have fallen to the 2 per cent target level last month, but the energy shock caused by the Iran war is keeping the cost of living high, bank governor Andrew Bailey told MPs on the Treasury Committee.
He said the conflict was “the most significant change in the landscape” for the economy.
His comments follow news that the government is urging retailers to cap the cost of staples such as eggs, bread and milk in exchange for potentially easing regulations.
The governor said: “If you start doing that naturally, then you are effectively moving prices artificially based on costs, and that is not something that is sustainable in the long term.
“There may be benefits to doing this in the short term, but this needs to be thought through.”
A government minister denied plans for price caps but confirmed it was in talks with supermarkets over concerns about rising inflation.
Supermarket managers on Wednesday rejected proposals for price ceilings on essential groceries, calling them “completely unreasonable” and “stupid”.
M&S boss Stuart Machin said he had received “no direct communication” about the reported offers.
He told reporters: “This is complete nonsense. I don’t think the government should be trying to run things.”
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Interest rates were kept at 3.75 percent last month, which the Governor said was reasonable due to the “unpredictability of events in the Middle East.”
Mr Bailey added: “Before all this happened there was a reasonable expectation that we would probably cut once or twice this year, the market was pricing in that.
“The market is not currently and effectively pricing what is taken off the table.
“We effectively tightened policy because we took away the expectation of disruption before you even start talking about what happens next.”
Mr Bailey told the committee that two key considerations for the Bank were how long the conflict would last and its assessment of the potential for “permanent damage to energy supply infrastructure”.
Official figures published on Wednesday showed that Consumer Price Index (CPI) inflation fell to 2.8 percent in April from 3.3 percent in March.
Mr Bailey said the data showed “surprisingly benign food price inflation”, which was slightly the opposite of what we would expect.
But he warned there would be a “delayed response” from higher oil prices to energy bills, adding: “The inflation figure we received this morning reflected the fact that the Ofgem cap fell in April; we know this will rise in July.”
