Haldane Says U.K. at ‘Dangerous Moment’ as Inflation Heads to 4%

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Bank of England Chief Economist Andy Haldane said inflation is likely to finish the year close to 4%, posing the biggest challenge to policy makers since the pound plunged in 1992.

The forecast would be double the central bank’s target and over the 3% the BOE estimated earlier this month. Haldane, leaving his post on Wednesday, used his last speech to urge his colleagues to shift their attention away from stimulating the economy and toward controlling the pace of price increases. Delaying action, he said, will require bigger action later.

“This would leave monetary policy needing to play catch-up to re-anchor inflation expectations through materially larger and/or faster interest rate rises than are currently expected,” Haldane said in a text released by the BOE on Wednesday. “If this risk were to be realized, everyone would lose -- central banks with missed mandates needing to execute an economic hand-brake turn, businesses and households facing a higher cost of borrowing and living, and governments facing rising debt-servicing costs.”

The remarks were the most strident yet by the BOE’s lone hawk on inflation, who since May has broken twice with his colleagues in voting to pare back the central bank’s bond buying. Haldane said data showing a strong recovery in the economy are starting to change minds on the committee.

For now, he said there’s no evidence that the expectations that consumers have about future price rises are moving away from the BOE’s 2% target. The rapid recovery from Covid-19 lockdowns is changing the economy rapidly, and risks are rising that policy makers will have to shift quickly toward containing prices, he said.

Central banks from the U.S. to European Union are weighing when to scale back emergency support for the economy and shift toward fighting inflation. Haldane said that task is the biggest challenge for policy makers since 1992, when Britain’s currency plunged out of a EU exchange-rate mechanism, triggering a sharp recession.

“Expectations of inflation feel more fragile,” Haldane said. “In financial markets they’re higher than they have been for a decade. I wouldn’t want those doubts to rise.”

While most policy makers at the BOE have described price pressures as “temporary” and that inflation will dip back to target in 2022, Haldane said there’s a rapid shift underway that many central bankers are starting to understand.

“We’re moving from a regime of rather localized shortages and price pressure to a world of slightly more generalized shortages and generalized price pressures -- from pockets of excess demand to aggregate excess demand,” Haldane said in the speech hosted by the Institute for Government. He added that quick action is necessary because “getting the cat back in the bag is jolly hard work.”

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