Sunak acknowledged UK inflation was proving ‘more persistent’ than expected

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Rishi Sunak on Tuesday acknowledged that inflation was proving “more persistent than people anticipated”, as he vowed to clamp down on public borrowing and take a “responsible” approach to public sector payrolls.

The prime minister said the Bank of England was facing a “difficult” decision and that higher interest rates would take longer to slow the economy as more people were covered by fixed rate mortgages.

Addressing senior lawmakers, Sunak said it was critical for the government to support the BoE by being “responsible” for public sector lending and payments, warning: “If we get that wrong, it makes the inflation situation worse.”

Sunak will in the next few weeks decide whether to support a pay increase proposed by an independent review body for public sector workers, with ministers hinting that the expected increase—usually around 6 percent—may have to be capped to keep inflation down.

Speaking on the House of Commons liaison committee, Sunak was repeatedly pressed on whether he would achieve his target of halving inflation to 5.4 percent by the end of the year, but he declined to answer.

Asked by Harriett Baldwin, the Tory chair of the Commons Treasury selection committee, what percentage chance she would have to meet that inflation goal, she said: “I don’t have one. We are working 100 percent to make it happen.”

Sunak acknowledged the BoE’s task of slashing inflation to the central bank’s target of 2 percent had been complicated by a higher proportion of people using fixed-rate mortgages, meaning they were temporarily shielded from rising borrowing costs.

He said the “transmission mechanism” through which higher BoE rates are passed on to households “may be slower on mortgages than in the past”.

According to BoE data, 95 percent of residential mortgage increases in 2022 involve fixed rates. That compares to 92 percent in 2019 and 77 percent in 2013.

Sunak said the government should support the BoE through tight fiscal policy and supply-side reforms meant to boost the economy’s capacity to grow without overheating.

The prime minister, who has been criticized by a cross-party group of lawmakers, has also backed financial regulators in trying to ensure that higher interest rates are passed on to savers.

The Financial Conduct Authority will meet the bank on Thursday to discuss delays in passing higher BoE rates to people with instant access savings accounts. Sunak agrees that “the issue needs to be resolved”.

He said he “fully supports” the FCA’s work and said the watchdog will from August 1 have the power to pressure banks through new “consumer duties” placed on financial services companies.

In his multi-subject evidence that lasts 90 minutes, Sunak reiterates his enthusiasm for artificial intelligence, saying developments in the field can help cure cancer and dementia and drive economic growth.

But he acknowledged if technology got out of control it could lead to “large-scale social shifts” and he would like to see “fences” put in place.

The UK will host an AI safety conference in the fall but admits that any talk of international regulators – similar to the International Atomic Energy Authority – is a “long-distance” prospect.

Sunak also played down the idea of ​​the next King’s Speech, which will be the government’s final legislative program from this parliament, containing AI measures. “We can do a lot of things without laws,” he said.

Sunak defended the civil service against accusations by some Tory MPs that Whitehall’s “blob” thwarted ministers’ wishes. Asked if he recognized the expression, the prime minister replied: “No.”

“I have always been supported by civil servants who are very diligent and work hard,” he added.

Meanwhile Sir Chris Bryant, chairman of the Commons standards committee, challenged Sunak over why he was not present at the debate and vote by lawmakers on a report condemning former prime minister Boris Johnson for lying to parliament.

Bryant said Sunak was willing to “opinion” on the rules of cricket following the controversy in the second Ashes test between Australia and England, but “not about breaking the rules in parliament”.

Sunak said he missed the Commons vote on the report on Johnson to attend a fundraising dinner for an “amazing charity”.