The Bank of England faces the challenge of explaining why inflation exceeds its forecast


When UK interest rate makers announce their latest decision and their latest assessment of the economic outlook on Thursday, there will be a lot of explanation work to do.

In May of this year, the Bank of England stated that inflation will briefly exceed its 2% target at the end of this year, and then decline as energy prices stabilize and supply chain bottlenecks ease. Andy Haldane, who recently stepped down as the bank’s chief economist, was the only member of the Monetary Policy Committee to vote for tightening policies to prevent threats to price stability.

But inflation has exceeded the Bank of England’s forecast for three consecutive months, reaching 2.5% in June, and economists predict that it may reach a peak close to 4% and hover above the target.

Analysts don’t expect monetary policy changes at this meeting, but given the speed at which the committee’s forecast is surpassed by events, four things in Thursday’s report are worthy of attention.

How does the Bank of England think the recovery will last?

As the Monetary Policy Committee hinted after its June meeting, the Monetary Policy Committee may raise its forecast for near-term economic growth to reflect the speed of recovery seen in the early days of the reopening and the unexpectedly strong labor market.

But this does not necessarily mean it will improve the medium-term prospects. Recent data shows that as the Covid-19 Delta variant spreads, consumers are becoming more cautious and problems in the supply chain hinder production.

“The last mile will be the toughest,” Barclays Bank economist Fabris Montagne warned. He believes the Bank of England’s forecasts show that by the end of 2022, the UK’s output will still be lower than it was before the outbreak. 2% lower.

Is the surge in inflation still temporary?

The new forecast will almost certainly show that the inflation rate is further above the Bank of England’s 2% target and will remain high for longer than expected in May.As Philip Shaw, an economist at the investment bank Investec, points out, this debate is “similar to what is happening [US Federal Reserve], Especially whether price pressures have become deep-rooted or temporary.”

The Governor of the Bank of England Andrew Bailey argued last month that part of the reason for the soaring inflation was the base effect (caused by last year’s energy price fluctuations) and short-term bottlenecks in the global supply chain. He believes that as consumers spend more evenly on goods and services again, price pressures will ease.

Line chart shows that UK inflation quickly rises to a three-year high

However, Ben Broadbent, the Bank of England’s deputy governor for monetary policy, admitted last month that it is difficult to “fully explain the unusually strong inflation” and that some price pressures may persist—especially if the labor market The mismatch leads to higher wage growth.

To what extent has the Monetary Policy Committee turned to austerity policies?

Michael Sanders, a member of the External Monetary Policy Committee, sent the strongest signal that he is now inclined to vote for an early end of quantitative easing, saying last month that “some of the current monetary stimulus measures may be withdrawn soon.”

Sir Dave Ramsden, the Bank of England’s deputy governor in charge of banking and markets, also took a tougher tone, saying that the austerity conditions may be met “earlier than I had previously expected.”

But other committee members, including Jan Vlieghe and Jonathan Haskel, made it clear that they believe it is too early to tighten policy and risk stifling the recovery. Most economists believe that before Haldane is replaced, the majority of the eight MPCs with insufficient membership will vote to maintain interest rates at 0.1% and keep their quantitative easing targets unchanged. The current rate of asset purchases will bring the stock of Phnom Penh bonds to 875 billion pounds by the end of the year.

There are two reasons for caution: it is uncertain whether the vaccine is sufficient to prevent the spread of Delta variants, which puts too much pressure on the hospital; as the vacation plan gradually ends and other forms of government support are cancelled, new jobs may be Drain.

“Our hunch is that MPC will be waiting for an opportunity,” said Ruth Gregory of Capital Macros, a consulting firm.

Will the Bank of England further explain how it will arrange the withdrawal of stimulus measures?

The Bank of England is conducting an internal review to determine how it will withdraw stimulus measures when it begins to tighten policy, and revisit its previous position that it will only begin to relax quantitative easing after raising interest rates to at least 1.5%.

Bailey hinted that the Bank of England does not have to wait until then to reduce its asset stock-it can even choose to start shrinking its balance sheet before raising interest rates for the first time.

MPC is unlikely to reach a conclusion later this year, but the market will pay close attention to any hints of how its methodological principles may change.

Hande Kucuk, deputy director of the National Institute of Economics and Social Research, a think tank, believes that rising inflation makes the Bank of England urgently need to explain how it will gradually scale down to avoid market turbulence that may jeopardize recovery. It does work.

“It’s time for the Monetary Policy Committee to prepare,” she said, adding that a gradual approach to clear communication is needed, “to avoid a significant tightening of financial conditions, which could endanger the risk of a sustained recovery from the pandemic. “.



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