Bank of England Plays Down Risk of Runaway U.K. Inflation

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Bank of England policy makers pushed back against concerns that the U.K.’s rapid economic rebound from the pandemic will lead to a damaging wave of inflation.

The expected acceleration in prices this year will likely be temporary, Governor Andrew Bailey said in testimony to lawmakers Monday. Jon Cunliffe, one of his deputies, said inflation will later return to the central bank’s 2% target as growth slows.

While most economists agree, financial markets are betting that the central bank will raise interest rates as early as next year, implying that investors expect the recovery to gain enough momentum to force the BOE’s hand.

Monday’s comments come after data showed U.K. inflation more than doubled in April to 1.5%.

Market-based inflation expectations are now at their highest since 2008. The so-called 10-year breakeven rate -- a gauge derived from the difference between conventional bond yields and those linked to retail-price inflation -- has risen more than 50 basis points this year.

Andy Haldane, the BOE’s outgoing chief economist, has also been sounding the alarm about inflationary risks. He cast the only vote against keeping the central bank’s stimulus unchanged, opting for a reduction on the bond-buying program.

Cost Pressures

Haldane told lawmakers that inflation represents a bigger risk to the economy than scars on the labor market following the recession.

“My sense was that the balance of inflation risks is titled to the upside and therefore justified reducing that degree of accommodation by that 50 billion pounds,” Haldane said, adding that there’s a “better than even chance” that companies facing cost pressures will take advantage of the strong economic rebound to raise prices.

Michael Saunders, another policy maker, said he sees risks that inflation would “undershoot the target over time” due to lingering scars from the pandemic.

Bailey said policy makers need to watch inflation “very carefully,” though there are no signs that either inflation expectations or price rises are becoming entrenched. He attributed the recent gains to commodity prices and shortages in items such as computer chips.

“We hope some of those factors will correct,” he said.

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