Inflation Will Probably Dip Below 1%, BOE’s Tenreyro Says
U.K. Inflation Will Probably Dip Below 1%, BOE’s Tenreyro Says
(Bloomberg) --
U.K. inflation will probably fall below 1% in the coming months as the impact of the coronavirus pandemic filters through the economy, according to Bank of England policy maker Silvana Tenreyro.
Price pressures were already weak going into the crisis, she said in a speech delivered by video conference on Thursday, and the collapse in oil prices will depress them further. A large shift to online retail and an acceleration in remote working could lead to prolonged weakness in commercial rent inflation.
“Although ultimately, these changes should not have permanent effects on cost and price inflation, they may lead to effects that persist for some time,” she said. “Some of these behavioral changes will be temporary.”
It’s not yet clear how the BOE will respond, but policy makers will do whatever is needed in line with the central bank’s remit, she said in answer to questions after the speech. The recovery will probably be less V-shaped than one would like, she noted.
It will be hard to interpret inflation data during the current crisis, she said, as price collection becomes either more difficult or impossible in the case of businesses that have shut down. Huge shifts in spending patterns will also change the household consumption basket.
“Inflation in the near-term may be a particularly noisy indicator of where inflationary pressures are likely to settle after the current crisis abates,” she said.
Officials will give further analysis on May 7 when they publish their Monetary Policy Report.
When the virus passes, “the balance is leaning toward more deflationary pressures,” she said. “But again this will depend on how quickly we get out and the effectiveness of the various policies put in place.”
Current policy actions should help counterbalance some of the underlying weakness in inflation, Tenreyro said.
Still, she hinted that there could be more measures to come, saying “the MPC, coordinating closely with other policy makers in the bank and in government, will do whatever it can to minimize the disruption the crisis could cause for households, businesses and financial markets.”
The BOE’s benchmark rate stands at a record-low 0.1%, after officials cut it from 0.75% at two emergency meetings last month. The central bank also increased its asset purchase program by 200 billion pounds.
Despite the BOE’s actions, policy makers will not be able to avoid a rise in unemployment which will weigh on real wage growth across the economy, Tenreyro said.
It’s also possible that inflation could be affected in the other direction, with the depreciation of sterling and the loosening of fiscal policy pushing up on price pressures. “If there were an overshoot, the MPC would need to assess the speed with which to return inflation to target,” she said.
Elsewhere in the speech, Tenreyro didn’t sugarcoat the economic outlook, saying “it will not be possible to avoid further consequences for the economy” including rising joblessness, greater uncertainty, and a reduction in global trade and investment.
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