Outgoing chief economist says central bank could be forced to stop economy from overheating
Last modified on Wed 30 Jun 2021 15.36 EDT
The Bank of England’s outgoing chief economist has warned that inflation could rise by more than expected and force the central bank into a dangerous “handbrake turn” to stop the economy from overheating.
In a parting shot at his fellow rate-setters on his final day at Threadneedle Street on Wednesday, Andy Haldane said he expected that a surge in consumer prices would drive UK inflation close to 4% this year.
The Bank’s nine-member monetary policy committee (MPC), from which he is standing down, said last week it anticipated inflation to peak at 3% by the end of 2021, before falling back in 2022 as the post-Covid economic boom fades.
In a speech to the Institute for Government thinktank marking his departure from the Bank, Haldane said there were reasons to believe current isolated pockets of rising prices in parts of the UK economy would translate into a wider “significant and persistent” rise in inflation.
“By the end of this year, I expect UK inflation to be nearer 4% than 3%,” he said.
Such a scenario would force the central bank to raise interest rates at a faster rate or by a materially larger extent than currently anticipated, he said.
“If this risk were to be realised, everyone would lose – central banks with missed mandates needing to execute an economic handbrake turn, businesses and households facing a higher cost of borrowing and living, and governments facing rising debt-servicing costs. As in the past, avoiding that inflation surprise is one of the central tasks of central banks,” he said.
Haldane’s intervention marks his latest warning over the risks posed by inflation before leaving to run the Royal Society for Arts thinktank later this year. Should inflation peak at 4%, it would be double the Bank’s 2% target rate, set by the government as the target for the central bank.
UK inflation rose to 2.1% in May from 1.5% a month earlier, driven by rising fuel prices, as well as the cost of clothing, meals and pub and restaurant drinks as hospitality venues reopened after lockdown. However, much of the increase was due to the collapse in consumer prices and energy costs a year ago when the pandemic first started. Inflation is measured using a basket of goods and services and taking the 12-month price change.
Economists are, however, growing concerned that bottlenecks in global supply chains and rising commodity prices, coupled with booming consumer demand as Covid-19 restrictions are gradually relaxed, will feed through into higher prices in shops and for other goods and services.
This could be exacerbated by billions of pounds in government support for households and companies, as well as through low interest rates from central banks around the world, used to cushion the economic fallout from the pandemic.
However, others say recent inflationary pressures are likely to be temporary, while cutting back emergency support could choke off a sustainable economic recovery, and that risks still remain as the pandemic continues.
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