(Bloomberg) -- Bank of England policy makers face their toughest challenge since Britain crashed out of the European exchange rate mechanism 30 years ago, Deputy Governor Ben Broadbent warned.

Soaring prices are causing a cost of living crisis for households that the BOE can only make worse by raising interest rates but, with inflation forecast to peak at over 7%, more than triple the target, it has to act.

“This is the most challenging period for monetary policy since inflation-targeting began in 1992,” Broadbent said in written evidence to the cross-party House of Commons Treasury Committee.

The BOE has raised rates from 0.1% to 0.5% since December and markets expect further increases to around 2% at the end of this year, which would be the fastest tightening since it was given independence in 1997.

Britain switched to a central bank inflation-targeting regime in 1992 after falling out of the ERM in a moment of national humiliation when the government could no longer afford to keep sterling in a pre-set range around Germany’s Deutschmark.

Addressing lawmakers, BOE Governor Andrew Bailey compared the current energy and oil shocks, which will add at least 700 pounds ($952) to the average U.K. household energy bill from April, to “a tax on the U.K. from outside.”

However, he warned that Britons are likely to suffer an even tighter living standards squeeze due the escalating crisis in Ukraine.  “We have been hit by external shocks. Unfortunately, we have an upside risk on energy prices from worse things happening in Ukraine,” Bailey told MPs.

Jonathan Haskel, an external member of the rate-setting committee, echoed the warning in his statement.

“An upside risk to the inflation forecast could arise from geopolitical events. At the time of writing, there seems a material risk of further increases in global gas prices which would only add to the already considerable rises in CPI inflation we have seen so far,” he wrote.

Broadbent said that policy makers would normally look through shocks from high energy and oil prices but that a response is needed because “labor costs have started to accelerate.” As a result, they are taking actions that will slow the economy.

“The orthodox response to a big jump in oil prices is not to respond to it … because its influence on inflation doesn’t last long enough to be worth doing something,” he said. 

“If the price of oil jumps massively and we were to tighten monetary policy then the direct effect on inflation is gone after a year. So all you do is depress the economy.”

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