Bank of England says inflation likely to rise above 3% as recovery continues apace

Credit: PA

It’s the Bank of England’s job to keep prices stable and to intervene if they are not. And they’re not.

Inflation is already running above the Bank’s 2% target and the Monetary Policy Committee (MPC) - which sets interest rates - assumes that it is “likely to exceed 3% for a temporary period” as the UK economy continues to power its way out of a recession triggered by restrictions imposed to contain the virus.

The Bank’s latest assessment of our prospects is in many ways encouraging:

  • activity is bouncing-back faster than anticipated in May;

  • the housing market looks strong; consumer confidence has increased;

  • the number of furloughed workers is declining fast;

  • vacancies are above pre-Covid levels;

  • the impact of the decision to delay the lifting of the last of the COVID restrictions will be “relatively small”.

The Bank acknowledges that consumer prices are rising materially faster than it was projecting only last month but it takes the view that there’s plenty of “spare capacity” in the economy yet to be used and that the spike in inflation is “transitory”.

Credit: PA

“The economy will experience a temporary period of strong GDP growth and above target inflation after which growth and inflation will fall back,” judges the MPC in its minutes.

The nine men and women on the MPC voted to keep the Bank Rate pegged at an historical low of 0.1% and to push ahead with plans to create money electronically, known as quantitative easing (QE).

The recovery looks robust but interest rates remain set at “emergency” levels.

There was one dissenter. Andy Haldane signed-off as the Bank’s chief economist by voting to taper the QE programme before it reaches £895 billion.

Haldane has spoken publicly, and in colourful terms, about his concern that the rapid expansion in economic activity may be creating persistent cost and price pressures.

He talks of the “most dangerous moment” for managing price risks since the UK fell out of the ERM in 1992 and warns that “the beast of inflation” may yet roar.

Oil and other commodity prices have risen; so too have shipping costs; manufacturers complain about a shortage of raw materials; firms across the economy say they are struggling to recruit.

Meanwhile British households are enthusiastically spending the £150 billion of savings they accumulated in lockdowns.

There is a lot of money chasing a limited number of goods. The economy is hotting up, which is cause for celebration. The worry is it may be over-heating.