BOE’s Haldane Sees Risk of Central Bank Complacency on Inflation

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Bank of England Chief Economist Andy Haldane said he sees a risk of U.K. inflation accelerating more than expected, warning fellow central bankers against being too relaxed about taming the rise in consumer prices.

“For me, there is a tangible risk inflation proves more difficult to tame, requiring monetary policy makers to act more assertively than is currently priced into financial markets,” Haldane said in a speech released on Friday.

BOE’s Haldane Sees Risk of Central Bank Complacency on Inflation

The comments strike a more hawkish tone than other BOE policy makers, who have warned against potential long-lasting scars on the economy and labor market by the coronavirus crisis. Haldane has been the most optimistic member of the BOE’s rate-setting committee about the prospect of economic recovery.

The pound pared losses immediately after his remarks. U.K. bonds fell to a session low, erasing earlier gains, with the yield on 10-year gilts rising four basis points to 0.82%. For tenors 10 years out and beyond, yields are now higher than a year ago before the coronavirus pandemic struck Europe.

Dave Ramsden, the central bank’s deputy governor for financial markets, said policy makers have a “high bar” for unwinding the stimulus they’ve put in place and that gilts are moving in an “orderly” way. His remarks followed a sell-off in the bond market worldwide that gathered momentum in the past two days, driving yields higher.

The increase in gilt yields is “a corollary of that more positive news on the economy, driven by more positive vaccination news rather than something about a new worry around inflation,” Ramsden said in response to a question at a webinar on Friday.

“I can see U.K. policymakers being relatively relaxed, at least compared to their counterparts in the Fed and ECB,” said Philip Shaw, chief economist at Investec Bank Plc. “In the U.K. I think it’s different. The principal reason why we had to restart QE last March was wasn’t so much the level of yields, it was the dysfunctionality of the gilt market and markets in general.”

Britain’s main inflation rate is below 1% now. The Bank of England’s forecast is for it to reach the 2% target by the first quarter of 2022 and to settle just above thereafter.

The consensus from other members of the Monetary Policy Committee has been that the bank should keep interest rates low and maintain stimulus to help the economy recover. Policy makers expect a sharp recovery starting in the middle of the year as Prime Minister Boris Johnson’s agressive plan to vaccinate the population takes hold. They also see a surge in unemployment ahead.

“We’re going through one of these very long term, low interest rate periods,” Gertjan Vlieghe, a member of the MPC, said on Feb. 22. “It’s going to be with us for another decade, maybe another two.”

Earlier Friday, Governor Andrew Bailey told the Bournemouth Daily Echo that he expects a contraction in the first quarter, but the pace of Britain’s vaccination program gives hope that Covid-19 restrictions will lift soon.

After meetings with people along the south coast, Bailey said, “I came away there with a sense of it’s been really hugely hit but a sense of ‘Maybe we’re now beginning to see real light coming through at the end of the tunnel.’”

BOE’s Haldane Sees Risk of Central Bank Complacency on Inflation

Haldane acknowledged that as vaccinations are rolled out and some degree of normality returns, inflation may return to a stable state of rest or that disinflationary forces could return. However, his judgment is that risks are skewed to the upside, rather than balanced.

Haldane sees a “sharper and more sustained” rise than expected, potentially overshooting its target for a longer period thanks to resurgent demand.

Read more: Bank of England Recent Policy Comments and Decisions

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