Bank of England boss Andrew Bailey warns Rachel Reeves’ tax-and-spend Labour Budget will increase inflation and it may not come down again for two years

Rachel Reeves‘ tax-raising Budget will increase inflation, the governor of the Bank of England warned last night, raising fresh fears for the UK’s economic recovery.

Andrew Bailey said the rise triggered by the first Labour Budget in 14 years, which set out to raise £40billion mainly through tax increases for businesses, would be small compared to that triggered by Liz Truss‘s mini-Budget.

But while he told LBC that economists predicted it would eventually drop again,  it might take two years. The CPI rate fell to 1.7 per cent in September, the lowest level since April 2021.

The news of a blip in inflation, however small, is likely to un-nerve businesses already facing tax increases and families struggling with the cost of living. 

The Bank’s Monetary Policy Committee (MPC) decided to reduce the base interest rate from 5 per cent to 4.75 per cent at its latest meeting.  Eight MPC members voted for the cut, with one preferring to hold the rate.

But the Bank indicated that the process of reducing interest rates would be ‘gradual’ from here, hinting another cut before Christmas is unlikely.

There had been optimism about the prospect of swift falls after Mr Bailey previously suggested the Bank could be ‘aggressive’ if inflation remained on the right path.

But, speaking at a press conference yesterday, Mr Bailey admitted there was both ‘greater global uncertainty’ and ‘domestic uncertainties’.

He later told LBC: ‘Yes, there will be some increase in inflation, we think. 

But while he told LBC that economists predicted it would eventually drop again, it might take two years. The CPI rate fell to 1.7 per cent in September, the lowest level since April 2021.

‘But this is very small thing compared to what we’ve been through in recent years. So, I don’t want listeners to feel this is going to be something big. But the key points over the next two years or so, we expect it to come back down to our target of 2 per cent.

The announcement of the MPC decision came after Ms Reeves splurged on the public sector in her first Budget by pumping up borrowing and hiking taxes. 

The huge package has spooked gilts markets, increasing borrowing costs for the Government.

And the OBR watchdog responded by predicting that both inflation and interest rates will stay elevated for longer.

The MPC minutes pointed to ‘continued progress’ in getting CPI inflation under control.

But they highlighted ‘domestic inflationary pressures are resolving more slowly’ and the Budget would add just under half a percentage point to price increases.

Ms Reeves also came under a Budget attack yesterday over her decision to make rich farmers pay inheritance tax. 

Sainsbury’s boss Simon Roberts became the first major supermarket executive to speak out amid fears that changes to farm IHT rules could harm the country’s ability to grow its own food.

He said: ‘British farmers work incredibly hard to make sure that they can provide the foods that everyone wants to buy, that are British produced.’

‘I would urge the Government to work closely with farmers to make sure they listen to their concerns, because we need a resilient, successful, productive food system to make sure that we’re producing what we need here.’

Labour must ‘listen to them and try and find a solution,’ the head of the UK’s second largest grocer urged.