BoE Chief Underscores Importance Of Not Over-reacting To Temporarily High Inflation
01 July 2021 - 06:41PM
RTTF2
Bank of England Governor Andrew Bailey said the bank should not
over-react to temporarily high inflation in order to safeguard the
recovery.
At the Mansion House speech on Thursday, Bailey said the rise in
inflation is set to be a temporary feature of the bounce-back. A
premature tightening of policy to contain inflation will undermine
the economic recovery, he noted.
However, the bank will continue to watch the outlook for
inflation and in case of signs of more persistent inflation
pressure, the bank is prepared to respond with the tools of
monetary policy, the governor said.
At the monetary policy meeting last week, the bank forecast
inflation to exceed 3 percent temporarily, and to fall back once
the impact of rising commodity prices prove transitory.
The governor said there are at least three reasons why the
increase in inflation should be temporary. First, there are annual
inflation base effects caused by very weak activity and prices last
year which will not last beyond a year as a matter of
arithmetic.
Second, additional price pressures can arise from the various
shortages caused by imbalances in the recovery of supply and
demand, as the latter recovers more rapidly than the former. But
these imbalances should not last.
Third, the bank expects to see switch from demand for goods
towards services as restrictions are lifted, which should rebalance
the composition of demand. Over time, this should lead to an easing
of inflation as spending is redirected towards sectors with more
spare capacity.
Bailey said the economy will revert to the lower average
underlying growth rates. "Reverting to the pre-Covid pattern of
lower trend growth will bring its own challenges," Bailey
observed.
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