BOE Governor Bailey Says Food Price Controls ‘Not Sustainable’

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(Bloomberg) — Bank of England Governor Andrew Bailey said government controls on food prices are not sustainable in the long run, after reports that the UK Treasury asked supermarkets to cap the cost of essential products.

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Bailey and external rate-setter Swati Dhingra warned on Wednesday about the distortive effects of trying to control prices, a proposal the Treasury has since said it will not do.

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“You’re artificially moving prices relative to costs, and that’s not a sustainable thing in the long run, but there may be reasons” for a very short term intervention, Bailey told Parliament’s Treasury Committee in a hearing. “It does need to be thought through in that sense.”

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Drawing on her experience in India, Dhingra said controls were “very successful in being able to cure famine and poverty” but “it’s ended up creating is a highly distorted agricultural sector.” 

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The Treasury wanted supermarkets to hold down prices in exchange for an easing in regulations, people familiar with the situation said overnight. However, the plan faced fierce criticism from the retail sector, with Marks & Spencer boss Stuart Machin calling it “completely preposterous.”

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Treasury minister Dan Tomlinson said later on Wednesday that grocers will not be forced to cap prices but added the government was “talking to industry about the steps that they can take to support people with the cost of living.”

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Meanwhile, Bailey and his colleagues signalled they are not in a rush to hike interest rates to contain a spike in inflation caused by the Iran war but acknowledged the rising risk of a prolonged war.

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Bailey said the BOE has already effectively tightened policy to tackle the resurgence in inflation after backing away from rate cuts. Prior to the war, markets were pricing in one or two rate cuts in the UK before the conflict upended the outlook with investors now expecting close to two hikes this year.

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Bailey said this shift in expectations, in pushing up borrowing costs for households and businesses, has given the BOE “some time to assess.” 

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“Effectively we’ve tightened policy because we removed the expectation of a cut,” he told the members of Parliament. “We’ve got a somewhat softening picture for growth, we’ve got a somewhat softening picture for the labor market.”

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Catherine Mann, one of the most hawkish rate-setters at the BOE, raised concerns about the Iran energy shock affecting wage demands from workers but said “financial conditions have tightened dramatically.”

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External rate-setter Swati Dhingra added that there is “a lot of tightening already in the system” with bank rate holding at 3.75%, though she warned that “some of my worst-case scenarios have unfolded, or are looking like they might unfold.”

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Deputy Governor Sarah Breeden said there has been “sufficient tightening” in financial conditions to offset the current risk of “second-round effects.”

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“If it does look like we’re moving to a prolonged conflict with more meaningful second round effects, obviously we will have to be ready to move swiftly and, if necessary, forcefully,” she said.

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