Bank of England chief defends cautious rate hiking cycle, sees unprecedented shock to people’s income

Bank of England Governor Andrew Bailey.

The Bank of England's cautious approach to monetary tightening is being defended by Governor Andrew Bailey.

Three dissenters at the bank and a prediction of inflation peaking at 10% have left many wondering if the Bank of England should act more aggressively, such as front-loading with larger rate hikes.

Bailey told Cutmore that it was important to put that into the context of the shock that the bank is seeing.

We are seeing an unprecedentedly large shock to real income in this country coming from abroad. He said that the negative effect on real income is going to feed through to activity this year. After accounting for inflation, real income is a gauge of a person's purchasing power.

Like many central banks around the world, the BOE is tasked with steering the economy through an inflation surge that has been exacerbated by Russia's unprovoked onslaught in Ukraine.

The Monetary Policy Committee voted 6-3 to raise the base interest rate to 1%. The members in the minority preferred to raise their interest rates by half a percentage point. The main benchmark interest rate is used to set the cost of all sorts of mortgages and loans in the U.K.

The pound hit a low of 1.2393 against the dollar early Thursday afternoon in London.

The bank highlighted the risk of a recession for the world's fifth-largest economy. The BOE now expects the domestic economy to contract in the final three months of the year, partly due to the projected large hike in household energy bills in October.

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Bailey said that the bank was already seeing signs of diminishing consumer confidence, starting to form a large gap when compared with business confidence in the U.K.

The answer to the question of what monetary policy does has to start with the impact of the shock.

The impact of this shock on activity and inflation is going to be much bigger. He said how we calibrate the monetary policy needs to take that into account.

CNBC's Sam Meredith contributed to the article.