The Bank of England’s chief economist Andy Haldane has warned that the UK economy is facing “the most dangerous moment for monetary policy” since 1992. In an article in this week’s issue of the New Statesman, Haldane explains why the bank must intervene early to ward off the threats posed by “the tiger” of inflation.
“Policy is about balancing risks and these have shifted swiftly, significantly and decisively in an upward direction since the start of the year,” Haldane writes. “This makes it a dangerous moment, not just for central bankers but for the wider economy.”
Haldane, who will step down as the bank’s chief economist this month and will become chief executive of the Royal Society for Arts in September, warns that it would be a mistake for the Bank of England to treat the aftermath of the pandemic in the same way as the aftermath of the 2008 financial crisis (when interest rates remained no higher than 0.5 per cent). A faster, steeper recovery will require a different policy response.
“In my view this is the most dangerous moment for monetary policy since inflation-targeting was first introduced into the UK in 1992 after the European Exchange Rate Mechanism debacle,” he writes. “Having followed the global financial crisis playbook on the way in – rightly – there is a risk central banks also follow it on the way out. This would be a bad mistake. If realised, this risk would show up in monetary policy acting too late.”
Hundreds of billions of pounds have been saved by households over the past 15 months as spending in retail, hospitality, travel and other areas has been curtailed. But as Haldane explains, the consumer demand these savings will create in a newly reopened economy is not being met by businesses that have, in many cases, been forced into prolonged inactivity. The result: rising prices across the economy. Wages may rise too, as the skills shortage caused by the pandemic gives workers more bargaining power.
“My best guess is that the UK economy will move from bounce-back to boom without passing ‘go’, as cash is splashed and the holy trinity of animal spirits, buoyant balance sheets and fiscal pump-priming combine”, Haldane writes. But he adds that to leave “the tiger” of inflation unchained “runs the risk of the brakes needing to be slammed on to an overheating economic engine”.
A late attempt to address inflation – “an economic handbrake turn” – could mean raising interest rates in a slowing economy, leaving households and businesses squeezed between the rising cost of spending and more expensive debt.
[Read the full article here: The beast of inflation is stalking the land again]