Bailey Warns Against Russia Appeasement as Recession Risk Grows

(Bloomberg) -- Governments should be prepared to accept economic hardships as the price for forcing Russia to end its war in Ukraine, according to Bank of England Governor Andrew Bailey.

There should be no appeasement of Russia to avoid the side-effects of the west’s sanctions, Bailey said Thursday, as he delivered his strongest warning yet that the U.K.’s escalating cost of living crisis may tip the nation into recession.

Soaring energy prices and supply chain problems since the war began in February are adding to a squeeze on household incomes and threatening the deepest cost of living crisis the U.K. has seen since the 1950s. That’s left the BOE treading a fine line between tackling inflation and preventing the shock from derailing growth, he said.

“What Russia is doing in Ukraine is appalling -- it’s important that they understand.” he told the Peterson Institute for International Economics on the fringes of the International Monetary Fund’s spring meetings in Washington.

“There should be no appeasement of Russia just because we have to deal with economic problems as a consequence of what’s going on. We just roll our sleeves up and deal with this because that’s the right thing to do, hard though it can be at times.”

Europe and the U.S. have hit Russia with a barrage of financial sanctions but natural gas has been excluded as Russia provides roughly half Europe’s supplies.

Bailey also said the BOE was facing its “most severe test since independence 25 years ago” as it balances the need to raise interest rates to tackle inflation against driving the economy into recession.

“We are walking a very tight line between tackling inflation and the output effects of the real income shock, and the risk that could create a recession,” he said. Inflation is at a 30-year high of 7% and on track to drift into double figures for the first time since the 1980s.

Markets expect the BOE to raise interest rates to 2.25% this year, from 0.75% currently, piling even more pressure on borrowers. 

The governor also expressed concern about rising food prices and questioned whether the U.K. labor market would slow if there was a recession, as staff shortages are so acute employers may “hoard” workers. 

“We are now in a period of unprecedentedly large shocks,” he said, in reference to the pandemic and the war in Ukraine. 

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