Farmers have been warned to expect a continued spell of relatively high interest rates, despite better news on both general inflation and food price inflation in recent months.
Presenting the NFU’s annual Henry Plumb Memorial Lecture in London on Monday (20 November), governor of the Bank of England Andrew Bailey said it was “far too early” to be thinking about rate cuts.
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“Central bankers are perhaps pessimistic by nature,” he said. “Like farmers, we have to deal with a multitude of outside influences, and when inflation is high, we take no chances.”
The war in Ukraine had meant that UK food price inflation had risen higher and faster than anyone had expected, and had lasted longer, said Mr Bailey.
The recent downward trend was therefore “welcome news”.
The consumer price index had fallen from a peak of 11% just over a year ago to the current level of 4.6%.
And within that, food inflation, which had peaked at 19% in March of this year, was now standing at just over 10%.
“It means that we are on track to bring inflation down to target,” said Mr Bailey.
“But it is too soon to declare victory. Interest rates will have to stay high enough for long enough, to make sure we get all the way back to the 2% target.”
This cautious approach was justified, in part, by the clear risks of food price inflation rebounding in the months ahead.
“Food inflation can be volatile in the best of days,” said Mr Bailey. “Climate change is affecting weather patterns, increasing the risk of poor harvests.
“Global economic fragmentation can increase the risk of spikes in prices when supply fails and countries prioritise local markets.
“And the tragic events in the Middle East have added upside risks to energy prices and through that to the cost of food production.”
Mr Bailey also pointed to the tight labour market, which was pushing up wages, adding to the need for a “restrictive monetary policy”.
Indeed, interest rates may even have to rise again, he warned, in order to “squeeze inflation out of the system”.
“Let me be very clear: it is far too early to be thinking about rate cuts,” said Mr Bailey. “Returning inflation to the 2% target remains our absolute priority.”