THE Governor of the Bank of England has denied the institution was too slow to act on inflation after the government said it had “hugely missed” its target.

Andrew Bailey hit back after Business Secretary Kwasi Kwarteng said something had self-evidently “gone wrong” with the Bank’s mission to hold inflation around 2 per cent.

Mr Kwarteng, a supporter of Liz Truss in the Tory leadership race, said the Bank’s operations and targets should be reassessed.

But Mr Bailey said inflation was being driven by Russia’s unforeseen invasion of Ukraine, and Moscow cutting off energy supplies in response to western sanctions.

“We don’t make policy with the benefit of hindsight,” he told the BBC. 

The row illustrated how the Bank’s latest forecasts had catapulted the economy to the top of the political agenda - and the race between Ms Truss and Rishi Sunak to become the next Prime Minister.

On Thursday, the Bank published an extraordinarily bleak set of predictions as it hiked interest rates by 0.5 points to 1.75%, the biggest increase in 27 years.

It said inflation was now set to peak at 13.3% instead of the 11% forecast in May, and that the UK would enter a recession at the end of this year and stay in the slump for all of 2023.

Living standards are set to fall by around 5% over two years, the biggest drop since World War II.

Attorney General Suella Braverman said interest rates should have been raised “a long time ago” to counter inflation but the Bank had been “too slow”.

Mr Bailey denied being asleep at the wheel.

He said: “I’d challenge anyone sitting here a year, two years ago, to say there will be war on Ukraine and it will have this effect on inflation.”

He also defended the independence of the Bank, but said he would stay in post even if the next Prime Minister made changes to the Bank’s mandate.

“I made a commitment to see the tenure out – it’s an eight-year term. 
"It’s part of the fabric of the independence of the Bank of England that doesn’t change with changes of Government and changes in views.

“We will discuss with the Government a number of issues, some of them monetary policy, some in the new financial regulatory regime. 

"But it’s very important for the Bank that it’s clear there is this stability in the term of the governor.”

He warned higher pay could feed into inflation, despite people struggling with bills.

“If everybody tries to beat inflation, it doesn’t come down, it gets worse, that’s the problem.

“I put this in terms of high pay rises and high price increases, because in that world it’s the people who are least well off who are worst affected, because they don’t have the bargaining power. I think that is something that broadly we all have to be very conscious of.” 

But Mr Kwarteng told Sky News: “We need to look again at what the mandate is [for the Bank] and how best they can actually fulfil that mandate.

“That means that if your target is 2% and you’re predicting 13%, something has gone wrong and you’ve got to look at how the Bank is organised and what the targets are. It’s a hugely missed target.”

Speaking to investors in the City of London, Ms Truss, who has claimed a recession is “not inevitable”, todayaccepted a “tough winter” lay ahead.
However she doubled down on her uncosted plan for £30bllion of tax cuts, saying the Bank’s warning underlined the need to drop “business-as-usual” policies to help “reform the economy”.

She said: “The reality is we’re facing a recession if we carry on with our business-as-usual policies. People are struggling - whether it’s to pay food bills or fuel bills - that’s why it’s very important we reverse the national insurance increase, we have a temporary moratorium on the green energy levy to help people with their fuel bills.

“The most important thing is getting the economy going so we avoid a recession. The business-as-usual policies aren’t working. We need to do more. That’s why I am determined to reform the economy and keep taxes low.”

She added: “I know it’s going to be a tough winter, I want to do all I can to make sure we’re releasing the reserves in the North Sea of gas, I want to get on with things like fracking in areas that support it, and I also want to make sure that we’re moving ahead with nuclear power and more renewables.

“Of course, it will take time but the best time to start is today in moving that forward, as well as giving people all the help we can by keeping their taxes low and getting the economy going.”

Mr Sunak has warned that Ms Truss’s plans would stoke inflation by increasing borrowing, pushing up interest rates and mortgage bills.

One of his supporters, former Tory former cabinet minister Liam Fox, said he believed a recession was “inevitable” despite Ms Truss suggesting otherwise.

He said: “What Liz seems to be saying is, at a time when we are already spending £85billion on debt interest, twice as much as we’re spending on defence during a conflict in Europe, we should be borrowing even more money.

"That’s been tried before. If there was an easy way to get out of the inflationary problem and growth, don’t you think it would have been done here or the United States or in Europe?”

Shadow chancellor Rachel Reeves said that Ms Truss and her allies were being “deeply irresponsible” in questioning the Bank’s remit in the leadership race. 

"It creates huge uncertainty that will hold back vital investment in our economy,” she said.