BOE’s Haldane Urges Laser Focus to Avoid ‘Nasty’ Inflation Shock

The Bank of England must have a “laser focus” on keeping inflation expectations in check after the pandemic, Chief Economist Andy Haldane said, highlighting the tricky balance the nation faces in managing its massive debt burden.

While the BOE is willing to let price growth temporarily overshoot its 2% target as the economy emerges from the current crisis, there can be no question of letting that sentiment become entrenched, he said. Any country that lets inflation expectations spike would see bond yields rise, boosting the cost of debt repayments and undermining the recovery.

“The last thing the world needs right now is a nasty inflation surprise,” Haldane, 53, said in an interview for Bloomberg’s Stephanomics podcast released Wednesday. With a brief overshoot, “we’d be super vigilant, with so much monetary stimulus and fiscal stimulus having been put in the system, that this doesn’t show up in any more medium-term measures.”

BOE’s Haldane Urges Laser Focus to Avoid ‘Nasty’ Inflation Shock

The BOE, like many of its peers, knows it’ll have to find a way to ensure price stability without wrecking government finances. Nations across the world are grappling with the implications of the massive fiscal spending needed to support companies and households through the Covid-19 crisis.

U.K. public debt is now at a peacetime record, equivalent to more than a full year’s economic output. That’s been manageable so far because the BOE cut interest rates to almost zero and ramped up its bond-buying program, pushing the government’s borrowing costs to a record low.

Whether policy can stay that loose depends on how businesses and consumers respond when the crisis ends. A gauge by Citigroup Inc. and YouGov last week showed U.K. household inflation expectations for the next 12 months jumping.

BOE’s Haldane Urges Laser Focus to Avoid ‘Nasty’ Inflation Shock

“If this year has taught us anything, it’s that we need to be super sensitive and super responsive to the data,” Haldane said. “Is this more like the aftermath of a financial crisis -- slow and steady -- or is this more like the aftermath of the 1918 flu pandemic or a world war, which elicited a much faster release of pent-up demand?”

Long-term Shifts

Haldane, a 31-year veteran of the BOE and one of nine members of its Monetary Policy Committee, also said the long-term balance of pressures on prices appears to have shifted.

Academics are embroiled in debate over whether aging demographics and a populist backlash against globalization are putting the world on track for an inflation upturn after years of subdued price growth.

“I am open to that possibility,” Haldane said. “This is a situation where the risks are balanced, evenly balanced, from a situation of the past 10 years where the skew of risk has been toward the downside. And that is a significant shift, and one that we as central bankers need to absolutely take into account.”

The chief economist spoke on Dec. 18, with British and European Union officials still deadlocked on trade talks before the Brexit transition ends, and just before the closure of the U.K.-French border to lorries to curb a new strain of Covid.

The U.K. is in for a “bumpy ride” in the near term, he said, but could see a “relief recovery” as the virus risk dissipates and pent-up demand is released, he said.

“Funnily enough, the further you peer into the future right now, the clearer things are becoming now in the light of the vaccine,” he said. “I feel much more confident about the second half of 2021 than I do about the first quarter of 2021, which is unusual but should be encouraging.”

©2020 Bloomberg L.P.

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