The governor of the Bank of England said the BoE would need substantial proof the economy was recovering before considering tightening monetary policy to combat inflation.
In a speech Andrew Bailey pointed out the bank’s forward guidance that says it will not squeeze monetary policy until there was “clear evidence” that progress was made in eliminating spare capacity in the economy.
He said the guidance recognised the “scale of the shock, the high level of uncertainty and the risks around the Covid recovery” which are still weighted to the downside but improving.
Bailey said: “It [the guidance] sets out that there is a burden of proof we will need on the sustainability of the recovery. But it does not deviate from the usual medium-term nominal anchor, the 2% inflation target. And in this context it is encouraging that measures of inflation expectations have remained relatively stable in the UK, despite the seismic shocks and unprecedented policy response we’ve experienced over the past year.”
His comments suggest BoE rate setters are less worried about the return of inflation than other commentators after an increase in bond yields suggested higher inflation could be on the way. US Federal Reserve Chairman Jay Powell said last week the central bank would be “patient” about easing monetary stimulus with joblessness still high in the US.
Bailey predicted the economy would grow rapidly later in 2021 and that inflation would return to around the BoE’s 2% target. Scarring may be less severe than after previous recessions partly because of the level of support from the BoE and the government, he said.
“That recovery is assisted by the continued support the MPC is providing through low interest rates and quantitative easing, and in my view it amply justifies our current stance on monetary policy,” he said at a speech for the Resolution Foundation thinktank.
