High interest rates are temporary, says Andrew Bailey

While more rate rises are on the way, Bailey’s comment about a return to “low global equilibrium” is one of the first suggestions that the Bank expects higher rates to be short-lived.

Factors such as increasing life spans have pulled down interest rates globally in recent decades as people save up more money for their retirements, and this is “expected to persist”, the Governor said.

Technological changes have also been important as automation spreads through the economy.

So far there is no clear evidence the pandemic will change this, despite some economists warning that Covid has unwound some of the globalization which helped keep inflation, and so interest rates, low in recent years.

“It is too soon to tell what the long-run impact of the pandemic will be for the economy,” the Governor said in a speech to the Official Monetary and Financial Institutions Forum.

“It is worth bearing in mind that, while the pandemic was a large and unprecedented economic shock, with profound changes to labor markets and the way we work, it is possible that its long-run effects on productivity will be small.”

Britain is heavily exposed to global forces and flows of money internationally, forcing the Bank to set its interest rates based on those worldwide borrowing costs.

“For an open economy like the United Kingdom, the trend real rate is pinned down by global forces; as capital is free to move around the world, interest rates would depend on the balance of savings and investment in other countries as well as the United Kingdom,” the Governor said.

The comments suggest the impact of the rapid rises in interest rates – such as a slowdown in the housing market and strain on indebted businesses, and aid for beleaguered savers – may only last for a short spell if the Bank does cut rates again in the years you eat

Mr Bailey did not commit to any specific course of action on interest rates in the coming months, but stressed that the MPC “will take the actions necessary to return inflation to the 2pc target”.

“The scale, pace and timing of any further increases in Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures,” he said.

“The Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response. Bringing inflation back down to the 2pc target sustainably is our job, no ifs or buts.”

Financial markets currently expect the Bank to raise its base rate to 2pc by September and at least 2.5pc by the end of the year.