BoE chief economist warns of inflation but says COVID could offer supply-side benefits

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The outgoing Chief Economist of the Bank of England, Andy Haldane. Photo: Reuters

It is possible that the response to the COVID crisis will end up benefiting the UK economy on the supply side, said Andy Haldane, chief economist at the Bank of England (BoE), as he highlighted guard against the need to act quickly to “nip inflation in the bud”.

Speaking at the Institute for Government, Haldane said that the adverse effects of the pandemic on the economy “have been very significantly alleviated, not least thanks to the political actions that we have taken on a large scale and quickly.”

“For now, you can easily tell a much more positive story about the economy on offer,” he said. This is partly because employees are more productive without having to travel – which he said was one of the “least productive forms of human activity” – and partly because companies have “equipped themselves” in the digital age.

Haldane, who will leave the bank in September, also warned of rising inflation. He said if nothing was done it wouldn’t surprise him if it went “well north” of the government’s 2% target.

Andy Haldane on a call with Bronwen Maddox, director of the Institute for Government.  Photo: IfG

Andy Haldane on a call with Bronwen Maddox, director of the Institute for Government. Photo: IfG

He said the UK must act very early to stop rising inflation, to avoid having to raise interest rates, which could come as a shock to mortgage holders and consumers. corporate borrowers – “the last thing we need right now”.

According to Haldane, history has shown that inflation can often start with localized price pressures, which eventually become widespread, and temporary price increases, which end up being persistent.

He said that this is a “cumulative evolutionary process that we have seen time and time again” and that politically the process needs to be nipped in the bud.

Read more: Bank of England raises inflation expectations but keeps rates unchanged

The Bank expects UK CPI inflation to hit 3% in the coming months, but insists it will then drop to its 2% target as long as the stimulus measures will be maintained.

Haldane also said the 2008 global financial crisis helped the economy “flex its political muscles” without which the government’s response to COVID would not have been “as swift or as significant”.

“We should feel secure from where we were 10 or 12 years ago. The system in the UK and around the world is on more stable feet and on a solid foundation.”

Last week, the BoE voted unanimously to leave interest rates at record highs of 0.1% despite fears of rising inflation.

In a move that was widely expected, it also kept the stock quantitative easing (QE) target at £ 895bn ($ 1.2bn) as the Monetary Policy Committee remains cautiously optimistic about the recovery. British economy.

Haldane was the only member to vote for the early reduction of this quantitative easing round, holding £ 100bn instead of finalizing the bond purchases slated for November.

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