Covid Variant’s Spread Sharpens Rift at BOE Over Tightening

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A surge in new coronavirus infections is raising concerns about the outlook for the economy at the Bank of England, intensifying a debate about how soon the U.K. central bank should move to contain inflation.

“The recovery from Covid is more fragile than might appear,” Catherine Mann, an economist named to join the BOE’s Monetary Policy Committee later this year, said in a written response to lawmakers in Parliament on Monday. Speaking to lawmakers, she said the bank should “not be premature in terms of tightening.”

Earlier, her colleague Jonathan Haskel said “tight policy isn’t the right policy” because of growing risks from the delta variant of the disease.

The remarks indicate divisions on the central bank’s Monetary Policy Committee likely to play out next month as the eight-member panel debates how to respond to an unexpected jump in inflation above its 2% target. Two other members of the MPC last week said the BOE should consider reining in its bond-buying program.

Prime Minister Boris Johnson’s government on Monday dropped most of the remaining lockdown restrictions that were aimed at controlling the virus -- even though new infections are spreading rapidly and Johnson himself is isolating after exposure to his health secretary, who tested positive for the disease last week.

Mann said the global economic recovery may be weaker than projections for 6% growth this year suggest. She said differences in the pace and timing of the rebound in each nation as well as choices made by households and governments about spending will mean an uneven recovery.

“A significant downside risk is that private business investment stays on the sidelines,” Mann wrote. “Exacerbating this is the possibility that policy impetus will divert asset prices without appreciable transmission to consumption and business investment.”

On inflation, Mann told the Treasury Committee, “I don’t see it becoming a spiral” and that she’d take a “granular” approach to examining which prices are moving instead of focusing on the headline figure.

Earlier on Monday, Haskel said the U.K. faces headwinds from a tighter fiscal stance and from a surge in the delta variant of the coronavirus.

“In the immediate term, the risk of a preemptive monetary tightening curtailing the recovery continues to outweigh the risk of a temporary period of above-target inflation,” Haskel said in the text of a speech.

Mann and Haskel’s remarks are a sharp contrast against those of Deputy Governor Dave Ramsden and Michael Saunders, who said last week that inflation is likely to reach 4% and that it’s right for the BOE to consider reducing its stimulus program soon.

Policy makers meet next month to revise inflation and growth forecasts. They’re on track to buy 150 billion pounds ($206 billion) of bond purchases this year, part of an effort to keep a lid on interest rates in financial markets. One option is for the BOE to halt that program early. It also could raise its benchmark lending rate.

In her testimony to lawmakers and in her questionnaire, Mann also said:

  • “We don’t see a lot of inflation in the global economy being passed thorough. I don’t see it becoming a spiral.”
  • Policy makers should take the lesson of the global financial crisis a decade ago, when there was concern about inflation and the sustainability of debt. “There was never a recovery of lost GDP. The losses were borne disproportionately by younger people. We don’t want to repeat that coming out of Covid”
  • “For most economies, returning to the pre-Covid growth rate should not be considered a sufficient outcome.”
  • On negative interest rates, she said “the tool seems to distort household savings, to raise risk taking, and to reduce the profitability and stability of banks, pension funds, and insurers. Taken overall, this tool has not had the magnitude of effect on inflation commensurate with the monetary policy effort”
  • Asked whether she’d vote to back negative rates she said, “it’s hard to say never,” and that research she’s done show the policy is often deployed too late
  • Quantitative easing may have been absorbed into financial markets, leading to “higher asset prices. We are at this point in a very difficult transition period where the disconnect between financial markets and the real economy is particularly great”
  • The U.K. will likely be hit by “spillover effects” from the U.S. economy, which is growing much more rapidly than other advanced economies. If the Federal Reserve moves sooner to normalize its policy, that could put pressure on the BOE as well

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