Andrew Bailey, governor of the Bank of England, insisted on Thursday that the central bank was not “whistling in the wind” as inflation accelerated and predicted the current sharp rise in prices would be temporary.
Responding to his former chief economist Andy Haldane, who called on Wednesday for the BoE to nip inflation in the bud as the economy “roared back” from the coronavirus crisis, Bailey said the BoE was not being complacent.
“It is important not to overreact to temporarily strong growth and inflation, to ensure that the recovery is not undermined by a premature tightening in monetary conditions,” he said.
The governor was giving his annual Mansion House speech, which was held in the morning rather than at dinner this year, and he took the opportunity to lay out his thinking on the economy.
He acknowledged the BoE had underestimated the pace of the rebound in activity as the economy opened up and the rise in prices that accompanied the burst in growth.
UK inflation has risen from 0.4 per cent in February to 2.1 per cent in April and the BoE expects it to rise close to 3 per cent later this year. Haldane on Wednesday said the BoE was overly optimistic and the rate of increase in prices was more likely to hit 4 per cent by Christmas.
But Bailey said the evidence still pointed to a temporary rise in inflation rather than something more persistent.
“Where the recovery in demand outstrips supply, it is entirely possible that we will witness temporary periods of excess demand, or what more commonly we might describe as ‘bottlenecks’,” the governor said.
While these bottlenecks would often be a sign of excess demand and spending, he said that the recovery from the pandemic was unusual because supply was getting back to normal at the same time as demand so it was likely that there would be temporary imbalances in some sectors.
“Many of the factors behind these constraints are global in nature, reflecting shortages of products and transport capacity, set against the strength of the recovery to date and expectations of strong future growth,” Bailey said.
Pointing to some areas where prices were falling, he said some of the inflation now being measured arose simply because prices had fallen a year ago so the comparison was with the depth of the first wave of the pandemic.
A third reason for inflation to be only temporarily problematic was that spending was likely to be directed at parts of the economy with spare capacity as patterns of demand normalised.
“I have set out the reasons why we expect this rise in inflation to be a temporary feature of the bounceback. The reasons for taking this view are well-founded, it is not a vain hope or a matter of whistling in the wind,” he said in pointed comments following the previous day’s warnings from Haldane.
Bailey did add, however, that the BoE was watching the outlook for inflation “very carefully” and if it saw signs of persistent price pressures “we are prepared to respond with the tools of monetary policy”.