BoE chief insists inflation jump temporary but tightening case growing

(Alliance News) - Bank of England Governor Andrew Bailey on Monday warned that the UK's pandemic ...

Alliance News 27 September, 2021 | 7:23PM
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(Alliance News) - Bank of England Governor Andrew Bailey on Monday warned that the UK's pandemic recovery is slowing, but said modest tightening may be warranted to bring inflation back to target.

He noted that the economic recovery from the pandemic is decelerating, and supply chain disruptions and labour shortages are presenting fresh headwinds to the rebound.

"A number of these supply bottlenecks are not obviously a product of Covid, though others are. It is also possible that the economic fragility created by Covid has amplified the impact of other shocks – either that or the gods really are against us. I think it is more likely Covid amplifying at work," he said in a speech to the Society of Professional Economists.

While inflation remains elevated - accelerating to 3.2% on an annual basis in August - the BoE still believes price pressures are "transient", with demand seen shifting back to services from goods and supply chains "likely to repair themselves".

"But, the pressures are very much still with us, and there is still we believe pass-through to retail prices to come, and manufacturers' output prices are still rising rapidly. Added to that is the uncertainty around how the labour market puzzle resolves itself, and how that will affect employment and earnings. Meanwhile, just to remind, the recovery is weakening," he said.

Bailey said that "all of us" on BoE's nine-strong Monetary Policy Committee believe there will need to be some modest tightening to meet its 2% inflation target over the medium-term.

"Recent evidence appears to have strengthened that case, but there remain substantial uncertainties and we are monitoring the situation closely," the BoE chief said.

The central bank's rate-setting committee last week voted unanimously to keep Bank Rate at 0.1%. It also kept the asset purchases steady at GBP895 billion, as widely expected.

However, the vote to maintain quantitative easing at the current pace was not unanimous, with a majority of 7 to 2. The MPC meeting minutes showed that developments since its August report "appear to have strengthened" the case for some modest tightening over the forecast period should the economy evolve in line with plans.

By Lucy Heming; lucyheming@alliancenews.com

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