(Bloomberg) -- Bank of England Governor Andrew Bailey moved to reinforce the option that interest rates could rise this year while cautioning about the limits of monetary policy to balance diverging forces in the U.K. economy.

The bank’s key rate would become the prime tool of tightening policy when the time comes, although moving too soon could disrupt the U.K.’s still nascent economic recovery, Bailey said.

The remarks both conveyed the signal that the central bank’s stance could change rapidly and also sketched out the limits for what policy makers should do. They highlighted difficulty the BOE will have in responding to slowing growth at a time when shortages are pushing up wages and prices -- and making essential supplies of gasoline scarce.

“Monetary policy will not increase the supply of semi-conductor chips,” Bailey said in a text of a speech to be delivered Monday night in London. “It will not increase the amount of wind, and nor will it produce more HGV drivers. Moreover, tightening monetary policy could make things worse in this situation by putting more downward pressure on a weakening recovery of the economy.”

He also said:

  • “The monetary policy response, if we need to make one, to the inflation pressure should involve Bank Rate not QE. There is no reason to beat about the bush on this point.”
  • “Unwind should be enacted by an increase in Bank Rate, and if appropriate would not need to wait for the end of the current asset purchase program.”
  • Underlying wage growth is around 4%
  • Inflation is likely to exceed 4% this year
  • Monetary policy shouldn’t respond to supply shocks that don’t become more generalized across the economy

Story Link: BOE’s Bailey Says Bank Rate is Key Tool for Monetary Tightening

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