Higher inflation throughout the year, Bank of England Governor warns
Inflation would continue to accelerate for the rest of the year in the UK as the economy recovers from the COVID-19 crisis, according to the Governor of the Bank of England (BoE).
Giving his annual Mansion House speech in the City of London, Andrew Bailey warned that inflation could be a longer-term problem unless pent-up demand reduces and supply chains can keep pace.
On his last day at the Bank of England this week, British economist Andy Haldane depicted the situation for the UK as “a dangerous moment” and said that “everyone would lose” from higher inflation.
Meanwhile, Bailey also warned about the situation and said that “CPI [Consumer Price Index] inflation is expected to pick up further above the target, owing primarily to developments in energy and other commodity prices.”
While the Bank of England’s inflation target was 2 percent, the rate from 0.4 percent in February to 2.1 percent in April, after lockdown measures eased and consumer spending picked up.
Economist Haldane predicted that the inflation rate will be closer to 4% than 3% by the end of this year, which means that the central bank will have to raise interest rates higher than previously expected.
Approving Haldane’s expectations, Bailey said if inflation was not to cool down, the Bank would have to increase interest rates in order to reduce high spending.
He said “If we see those signs [of inflation not falling], we are prepared to respond with the tools of monetary policy,” adding that inflationary pressures come from prices returning to pre-COVID levels and demand outstripping supply.
He described the pressure as “temporary,” but was at pains to accept that the government “must be on the lookout for the risk that these features are more sustained.”
Bailey’s suggestion of monetary policy followed on the heels of Haldane’s comments who believed that “monetary policy credibility feel more fragile at present than at any time since inflation-targeting was introduced in 1992.”
BoE's chief economist had previously said that the BoE needs to “start tightening the tap to avoid the risk of a future inflationary flood.”
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