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Bank of England mostly unfazed by inflation omens

Bank of England mostly unfazed by inflation omens

Bank of England Governor Andrew Bailey poses for a photograph on the first day of his new role at the Central Bank in London, Britain, on Mar 16, 2020. (Photo: Tolga Akmen/Pool via REUTERS)

LONDON: A short-term rise in prices in Britain caused by global supply chain pressures does not foreshadow longer-term inflation problems once the economy emerges from the coronavirus pandemic, Bank of England Governor Andrew Bailey said on Monday (May 24).

Britain's inflation rate jumped to 1.5 per cent in April from 0.7 per cent in March, due to a mix of higher oil prices, rises in regulated household energy bills and comparisons against weak prices a year ago during the depths of the pandemic.

"These transitory developments should have few direct implications for inflation over the medium term," Bailey said in an annual report to parliament's Treasury Committee.

Bailey described public inflation expectations as "well anchored". The BoE forecast this month that consumer price inflation would rise above its 2 per cent target to 2.5 per cent by the end of this year, before slowly falling.

However, Bailey told legislators that the central bank would need to rethink if there were signs that price pressures were becoming more widespread.

"We are going to have to be looking at the entrails of the inflation evidence very carefully from now onwards," he said.

BoE Chief Economist Andy Haldane - who voted this month to curtail the central bank's bond purchase programme - warned against taking too long.

"The situation we need to avoid like the plague is one where inflation expectations adjust before we do, or where we wait for proof positive that effects on inflation are not transitory before acting," he said.

Michael Saunders, an external member of the BoE's Monetary Policy Committee appearing before the same committee, also said supply chain pressures currently pushing prices up worldwide did not point towards a longer-term inflation overshoot in Britain.

"This is likely to continue to be restrained for some time by spare capacity in the labour market, with relatively weak underlying wage growth and subdued service sector inflation," he said.

But interest rates were likely to need to rise by a small amount - roughly half a percentage point over the next three years - if the economy recovered as forecast, Saunders said.

BoE Deputy Governor Jon Cunliffe said he would be keeping a close eye on the labour market when government furlough support - which is currently paying the wages of more than 2 million employees - ends on Sep 30.

Headline measures of wage growth and unemployment were distorted by the government's furlough scheme, so the true amount of slack in the job market was unclear, he said.

Britain's official jobless rate was 4.8 per cent in the first quarter of 2021. The BoE forecasts joblessness will peak at 5.8 per cent later this year, well below forecasts earlier in the pandemic. 

Source: Reuters

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