Bank of England expects UK energy shock on the scale of the 1970s

Britain’s economy is expected to suffer a growth slowdown amid the biggest single shock from energy prices since the 1970s, the governor of the Bank of England has warned.

Andrew Bailey said there were signs of slowing demand from consumers and businesses as they come under heavy pressure from the cost of living squeeze, with soaring prices for gas, electricity and other goods and services.

“The shock from energy prices this year will be larger than any single year in the 1970s,” he said at an event held by the Bruegel thinktank in Brussels on Monday. “The caveat is that the 1970s had a succession of years and we very much hope that would not be the case now. But as a single year, this is a very, very big shock.”

Threadneedle Street said earlier this month that inflation could reach 8% this spring after a sharp rise in household gas and electricity bills due on Friday. With inflation already surging before Russia’s invasion of Ukraine, it said global energy prices being pushed higher by the war could drive UK inflation close to 10% later this year.

The central bank has responded by raising interest rates, which now stand at 0.75% after a 0.25 point increase at its March policy meeting, as it put concerns over high inflation ahead of the impact on economic growth to stop the current bout of rising prices from becoming more persistent in future. The Bank has a target to steer inflation close to 2%.

Bailey suggested on Monday that the cost of living squeeze was likely to hit the UK’s economic growth rate as households and companies tighten their belts due to the increase in the price of energy and other goods and services.

“We expect it to cause growth and demand to slow. We’re beginning to see the evidence of that in both consumer and business surveys,” he said, suggesting that weaker rates of growth could lead to a cooling of inflation without the need for significant interest rate hikes from the central bank.

“We expect that this pressure on demand will weigh down on domestically generated inflation. For that reason we do expect inflation to return to target, two years or so out from now.”

The Office for Budget Responsibility, the government’s economic forecaster, last week downgraded its 2022 growth forecasts from 6% to 3.8% while warning that the highest rate of inflation in four decades would hit consumer demand.