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BoE on alert for signs of prolonged spike in inflation

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BoE on alert for signs of prolonged spike in inflation

The Bank of England is watching movements in the prices of goods and services “extremely carefully” for signs that UK inflation is about to rise persistently above the central bank’s target, governor Andrew Bailey said on Tuesday.

He told parliament that the BoE’s Monetary Policy Committee would not tolerate a persistent overshoot in inflation from its 2 per cent target — signalling it could raise interest rates in such a scenario — but he said he saw little evidence of this happening at present.

Bailey’s comments to the House of Lords economics affairs committee came ahead of the latest UK inflation figures due to be published on Wednesday, with economists expecting the rate to jump from 0.7 per cent in March to 1.5 per cent in April.

BoE officials said such a rise was to be expected because it would mostly reflect a return to normality after the rate was artificially depressed by extremely low petrol and energy prices over the past year because of the coronavirus pandemic.

“Our forecast at the moment is that we do expect inflation to pick up,” said Bailey, because there had been a “strong shift in energy prices”, but he expected any overshoot of the BoE’s 2 per cent target to be temporary.

The BoE predicts inflation is likely to rise towards 2.5 per cent by the end of this year, but then drop back towards its target.

“We see a bounceback in the economy, but we don’t see the momentum continuing forwards at that pace at all,” said Bailey, referring to expectations for high economic growth this year. “Fiscal policy is very supportive this year but actually starts to tail off next year.”

Questioned over media stories about a surge in raw material costs, Bailey said the MPC would need to see the evidence unfold, but there was no sign yet that inflationary pressure was likely to become embedded in workers’ wage demands or persistently high price rises.

“We do hear stories about input prices, but we are not yet seeing strong evidence of the pass through into consumer prices,” he added. “I can assure you we will be watching this extremely carefully and we will take action when we think its appropriate to do so — no question of that.”

Bailey was speaking to the Lords committee as part of its inquiry into BoE’s quantitative easing programme — under which the central bank has created money to purchase government bonds — and the effects on the economy.

Bailey said he thought QE had been effective during the Covid-19 pandemic in supporting the economy, but the programme was “more effective” at times of financial distress, such as in March last year, when it soothed emerging problems in credit supply to companies.

With BoE chief economist Andy Haldane voting at the most recent MPC meeting to curb the latest round of QE at £100bn rather than the planned £150bn by the end of 2021, Bailey said it had opted for the higher amount last November after putting various numbers though a BoE “assessment process” on the economic effects.

The central bank has not published the results of this exercise despite being asked by parliamentarians for its assessment of QE’s economic effects.

Published at Tue, 18 May 2021 18:46:42 +0000

https://www.ft.com/content/5605bea0-2926-4cb4-85d1-a23e0ed9f752