The Bank of England would risk choking off recovery with an over-hasty tightening of policy to combat a temporary rise in inflation, one of its policymakers has said.
Prof Jonathan Haskel, one of the eight members of Threadneedle Street’s interest rate-setting monetary policy committee (MPC), said the twin headwinds of the Delta variant of the coronavirus and the withdrawal of support from the government meant “tight policy is not the right policy”.
The Bank has been surprised by the speed at which inflation has picked up since the economy started to recover after the winter lockdown, but Haskel said much of the 2.5% rise was a result of one-off factors – such as the weakness of the economy during the first wave of the pandemic a year ago.
“In addition, the economy is fully not recovered yet and faces two headwinds over the coming months: the highly transmissible Delta variant and a tightening of the fiscal stance,” he added.
“Against this backdrop, risk-management considerations lean against a pre-emptive tightening of monetary policy until we can be more sure the economy is recovering in a manner consistent with the sustained achievement of the inflation target. For now, tight policy is not the right policy.”
Haskel said the immense support provided by the Treasury and the Bank had averted deep scarring – lasting detrimental effects such as long-term unemployment – and added this might increase inflationary pressure.
Even so, he made it clear he would not be voting for higher interest rates or an early end to the Bank’s bond-buying quantitative easing programme when the MPC meets early next month.
Haskel said the Delta variant was spreading exponentially across the UK and raised concerns about its impact on the NHS. The sensitivity of the public health situation to changes in Delta’s relative infectiousness was a reminder that new variants of the virus could knock the UK off course. “The possibility of further mutant strains, pressures on the NHS and many ‘pinged’ workers make our path to recovery fragile.”
Most of the recovery to date has taken place under the “protective blanket” of a variety of government schemes, such as the furlough, loan support for businesses, and protection against insolvency and eviction, Haskel said.
“Many of these have only just recently expired and more will expire by the autumn, notably the furlough scheme, the self-employed support scheme and the £20 universal credit uplift, which are scheduled to end in September.”
Two other MPC members, Ben Broadbent and Jan Vlieghe, will give closely watched speeches in the next week, which will give the financial markets a clue as to how the votes at the August meeting of the committee are likely to stack up.