Higher energy prices will send the annual inflation rate above 4% by the end of the year and keep it there well into 2022. On the face of things, the Bank of England is asleep at the wheel and should be taking steps to ease growing price pressures.
It is not quite so simple as that. los minutos of the latest meeting of Threadneedle Street’s monetary policy committee show the Bank opposed immediate action, with only two of the nine members voting to halt the money creation programme known as quantitative easing (QE). All nine backed keeping official interest rates unchanged at 0.1%.
Cierto, the Bank toughened up its language, sending out the message that higher than anticipated inflation meant the case for tighter policy – sketched out at the previous MPC meeting in August – was now stronger.
Ese, aunque, was really a case of the Bank playing for time. Given that it has a legal duty to hit the government’s 2% inflation target, the MPC could not simply ignore what has been happening to the cost of living in recent weeks. It will take time to translate words into action.
Central banks prefer to signal their intentions well in advance. That was the approach followed by the US Federal Reserve when it gave Wall Street plenty of prior warning about the likely tapering of its QE programme. And the Bank of England is doing something similar, dropping hints that borrowing costs might be going up sooner than the financial markets expect.
But for now, the MPC is adopting a wait and see approach. One reason for that is the high degree of uncertainty about the prospects for the economy. The rise in inflation has coincided with a slowdown in the recovery that began when lockdown restrictions started to be eased in March. There are more people still on the government’s furlough scheme than the Bank predicted in its August health check on the economy, and the scheme ends next week.
A second reason is that the Bank believes higher inflation is transitory (even though a bit less transitory than it previously thought). There are precedents for the MPC not taking immediate action to tackle an inflation overshoot when the economy has been subject to a severe shock. With the furlough scheme ending, living standards squeezed and tax rises to come in the spring, the Bank would prefer to leave policy unchanged rather than act in a way it might later regret.