© Reuters. A man looks towards skyscrapers of the City of London financial district as he crosses Waterloo Bridge in London
By Andy Bruce and David Milliken
LONDON (Reuters) – Bank of England Chief Economist Andy Haldane warned on Friday that an inflationary “tiger” had woken up and could prove difficult to tame as the economy recovers from the COVID-19 pandemic, potentially requiring the BoE to take action.
In a clear break from other members of the Monetary Policy Committee (MPC) who are more relaxed about the outlook for inflation, Haldane called inflation a “tiger (that) has been stirred by the extraordinary events and policy actions of the past 12 months.
“People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely,” Haldane said in a speech published online. “But, for me, the greater risk at present is of central bank complacency allowing the inflationary (big) cat out of the bag.”
Haldane’s comments prompted British government bond prices to fall to their lowest level in almost a year and sterling to rise as he warned that investors may not be adequately positioned for the risk of higher inflation and Bank Rate.
“There is a tangible risk inflation proves more difficult to tame, requiring monetary policymakers to act more assertively than is currently priced into financial markets,” Haldane said.
He pointed to the BoE’s latest estimate of slack in Britain’s economy, which was much smaller and likely to be less persistent than in the years following the 2007-09 financial crisis, thereby leaving less room for the economy to grow before generating inflationary pressure.
Haldane also cited a glut of savings built by businesses and households during the pandemic that could be unleashed, as well as the government’s large fiscal response to the pandemic, as other potentially inflationary factors.
Disinflationary forces could return if risks from COVID-19 or elsewhere proved more persistent than expected, he said.
But in Haldane’s judgement, inflation risked overshooting the BoE’s 2% target for a sustained period – in contrast to its official forecasts published early this month that showed only a very small overshoot in 2022 and early 2023.
Haldane’s comments put him at the most hawkish end among the nine members of the MPC.
BoE Deputy Governor Ben Broadbent said on Wednesday he saw no evidence that inflation expectations, whether from financial markets or surveys of consumers and businesses, had moved to levels that would worry the BoE.
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