Energy price shock will be bigger than in the 1970s, Bank governor Bailey warns

British households are facing a bigger shock from energy prices this year than at any time during the 1970s oil crisis, the governor of the Bank of England has warned.

Andrew Bailey said swings in commodity markets following Russia’s invasion of Ukraine posed a risk to financial stability and that the challenges facing the global economy now are bigger than after the 2007-2009 financial crisis.

“This really is an historic shock to real incomes”, Mr Bailey said at an event held by the Bruegel economic think tank in Brussels. “The shock from energy prices this year will be larger than every single year in the 1970s”.

After two oil price shocks in the 1970s, households faced double-digit inflation, peaking at more than 20 per cent, a sharp climb in unemployment, mortgage rates at 17 per cent and consumer price inflation that reached 25.3 per cent.

Bailey said that the resilience of financial markets could not be taken for granted and central bodies and authorities were watching the volatility of commodity markets very closely.

“I’m afraid the cost of doing business will reflect a huge change in risk and volatility in these markets,” Bailey said. “We have to watch very closely to ensure that the step change in the cost of risk doesn’t cause a market failure.”

Oil and gas prices have surged on the back of Russia’s invasion, which has meant households are facing a significant increase in their heating and fuel bills at a time when inflation is at a three-decade high.

The Bank of England, which said earlier this month that inflation could reach 8 per cent this spring and 10 per cent later this year, has to balance rising prices with the risk of an economic slowdown. Interest rates are now at 0.75 per cent after a 0.25 point increase at this month’s meeting in which officials softened their language on the need for further rate rises. Bailey said the bank had started to see evidence of an economic slowdown as a result of the wider pressures but insisted that it was appropriate to tighten policy.

“We expect it to cause growth and demand to slow . . . We expect that this pressure on demand will weigh down on domestically generated inflation, other things equal at the moment,” he said.

Analysts expect the next monetary policy committee in May to raise interest rates to 1 per cent but Bailey said the situation was very volatile which mean inflation could slow or accelerate more than the Bank had forecast.

The governor added there was a high degree of uncertainty facing the UK economy “we’ve got a pandemic followed by a European war, in any scale that is a very difficult position to be in for policy.”

Mounting concerns about weaker demand from the world’s largest crude importer triggered Brent Crude, the international benchmark, to slide as much as 7.4 per cent, or $9, to trade at $111.63 a barrel yesterday afternoon as China’s financial hub of Shanghai launched a two-stage lockdown of its 26 million people.

Bjarne Schieldrop, chief commodities analyst at SEB bank, predicted that demand for oil in China was expected to be about 800,000 barrels a day softer next month, compared with “normal” levels, as a result of the stricter measures.