LONDON (Reuters) -Bank of England Governor Andrew Bailey said on Thursday it was important not to over-react to a rise in inflation that was likely to prove temporary during Britain’s economic recovery from the COVID-19 crisis.
Echoing the message from the BoE’s June policy meeting last week, Bailey said the reasons the central bank thought inflation would not prove to be persistent were “well-founded”.
“It is important not to over-react to temporarily strong growth and inflation, to ensure that the recovery is not undermined by a premature tightening in monetary conditions,” he said in an annual Mansion House speech to leaders of the financial services industry.
Bailey added that the BoE would watch carefully for signs of more persistent inflation pressure.
“And if we see those signs, we are prepared to respond with the tools of monetary policy,” he said.
Sterling fell folowing Bailey’s warning against an over-reaction to rising inflation.
British consumer price inflation jumped to 2.1% in May, surpassing the BoE’s 2% target level sooner than the central bank had forecast.
Last week, the central bank said inflation would surpass 3% as Britain’s locked-down economy reopens, but the climb further above its 2% target would only be “temporary” and most policymakers favoured keeping stimulus at full throttle.
Only Chief Economist Andy Haldane, at his last policy meeting before leaving the BoE, voted to scale back the BoE’s 895-billion-pound ($1.2 trillion) bond-buying programme.
He warned last month that BoE faced its “most dangerous moment for monetary policy” since the European Exchange Rate Mechanism debacle in 1992.
A week earlier, the U.S. Federal Reserve began to move towards reducing its pandemic stimulus by signalling its first rate hike in 2023, a year earlier than previous projections.
RETURN OF FURLOUGHED STAFF
In his speech, Bailey said there were at least three reasons why the increase in inflation would probably be temporary.
They included distortions caused by comparing prices now with those of a year ago during the first lockdown; shortages of supplies caused by a rush of pent-up demand and pandemic-linked bottlenecks; and a return to spending on services which would smooth out demand that has been concentrated on goods.
As well as inflation, the BoE is concerned about a possible rise in unemployment.
The government began requiring employers to start contributing to the cost of keeping on furloughed workers from Thursday and was due to end the scheme at the end of September.
Bailey said in his speech on Thursday that a spike in average earnings was in large part due to heavy job losses in low-paying sectors such as hospitality which had been hardest hit by the pandemic.
“That is not where we should place most of our focus on the labour market,” he said. “Our focus should be on whether, and how rapidly, people return to the labour force, and in what degree.”
The BoE must also factor in risks from a new rise in COVID-19 cases, which has prompted the government to delay the lifting of the last social-distancing rules until July 19.
($1 = 0.7261 pounds)
(Reporting by Andy BruceEditing by William Schomberg and Pravin Char)
