Bank of England governor Andrew Bailey has said businesses are resisting decisions to pass higher energy costs onto consumers and instead looking to narrow margins and find other savings.
Speaking at an International Monetary Fund event in Bangkok, Bailey said firms were “clearly squeezing margins as well as cost cutting” in order to deal with a spike in energy prices. International oil and gas prices have risen over the last fortnight amid a continuation of conflict in the Middle East.
He added that it was becoming harder for firms to prevent prices of their own products from rising as the scope for cost-cutting became smaller.
“Talking to businesses, there is a very, very big focus on cost cutting and a very big focus on the difficulty of passing through,” Bailey said.
“Firms are clearly squeezing margins as well as cost-cutting, using margins. The longer the energy situation goes on, the harder that gets.”
The Bank’s Monetary Policy Committee will make a decision on whether to hike interest rates in the first week of November, days after Chancellor John Healey has delivered his maiden Budget.
Bailey’s call for higher growth
Policymakers on the nine-member committee have indicated that they were becoming more worried about inflation and business costs feeding through into the prices of consumer goods and services.
Household energy prices are expected to rise by at least 16 per cent in January compared to the increase in October, bringing Ofgem’s annualised energy price cap to just shy of £2,000.
The Bank’s main forecast suggests inflation will rise above four per cent in the first few months of 2027. At the last meeting, officials voted 6-3 in favour of keeping interest rates at 3.75 per cent.
Megan Greene, who voted for the Bank’s rate to be lifted to four per cent, suggested that strong growth could boost the argument for tighter monetary policy given more intense pressures in activity and pricing across the UK economy.
In the event in Bangkok, Bailey argued that higher interest rates had helped to subdue household income and weaken demand, thereby taming inflation.
He also noted that while GDP had risen at a faster rate than many economists, including those at the Bank, expected, it was “not as strong a growth as frankly we need”.