Bailey Says BOE Shouldn’t Overreact to Temporary Inflation Jump

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Bank of England Governor Andrew Bailey said policy makers shouldn’t overreact to a “temporary” jump in inflation, pushing back on speculation that he’ll soon move to tighten monetary policy.

Part of the recent inflation increase is due to statistical comparisons and shortages that emerged with coronavirus lockdown rules loosened, and those effects “should not last,” the governor said in a speech in London on Thursday. He also expects a shift away from goods consumption toward services as the economy more fully reopens.

“It is important not to over-react to temporarily strong growth and inflation, to ensure that the recovery is not undermined by a premature tightening in monetary conditions,” Bailey said.

The pound declined to a session low after the remarks were published, and was down 0.2% at $1.3804 as of 9:22 a.m. London time.

The remarks strengthen the impression that the BOE will overlook a surge in inflation above its 2% target while the economy reopens following 16 months of coronavirus lockdowns. It brushes aside concerns raised by Andy Haldane on Wednesday as he stepped down as chief economist urging policy makers to act before inflation takes hold.

While Haldane sees prices rising close to 4% by the end of the year, Bailey reiterated the bank’s forecast for inflation to peak at 3% and then fall back toward the BOE’s target next year. While the economy is rebounding quickly from the pandemic now, he expects slower growth next year.

“Our current view is that the economy will revert to the lower average underlying growth rates that we have seen since the financial crisis,” Bailey said.

Bailey said that policy makers will monitor carefully how prices respond in coming months and respond quickly if needed. He noted price pressures are creeping into the cost of raw materials and that he’s watchful for “signs of more persistent pressure and for a move of medium term inflation expectations to a higher level.”

“If we see those signs, we are prepared to respond with the tools of monetary policy,” he said.

Read More: Haldane Says U.K. at ‘Dangerous Moment’ as Inflation Heads to 4%

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