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15 Mar 2021 | 08:53

BoE's Bailey cautious on inflation amid uncertainty

(Sharecast News) - The governor of the Bank of England said he expected inflation to approach the BoE's target soon but that he was cautious about whether the trend was sustainable amid continuing economic uncertainty. Andrew Bailey suggested a recent increase in market interest rates did not augur rapidly rising inflation and differed with his chief economist over the potential for a post-lockdown consumer boom as restrictions are relaxed.

"Our current view of inflation is that it will get back towards our 2% target," Bailey told BBC radio's Today programme. "It will get back towards that level in the next two or three months. The important question here is: will that be sustained?"

He said the BoE's monetary policy committee would need "a lot of evidence" - more than normal - that inflation is rising sustainably towards the target. "I'm saying we will need to see evidence that the trend in the economy and therefore the trend in inflation is sustainable simply because of the uncertainty and the huge effect of the Covid shock."

Asked if inflation could reach 4 or 5% later in 2021, as suggested by some economists, Bailey said: "That is not something we have in our forecast. I'm afraid we have not seen the evidence of that."

Inflation edged up to 0.7% in February, to higher than economists had expected, but was still far below the BoE's 2% target. Recent increases in market interest rates have prompted predictions that prices will start to accelerate rapidly but Bailey disagreed.

"We watch rates in financial markets very closely. We have seen some increase in rates over the last month or so as have other countries. My view is that is consistent with the change in the economic outlook."

Bailey was also notably more cautious than his chief economist, Andy Haldane, who has said the economy is like a "coiled spring" ready to bounce back as households splurge money saved during lockdowns to visit restaurants and pubs and buy new TVs or cars.

Bailey said: "I think we now have a more balanced picture of risks. Theres some risk on the upside, as Andy Haldane has emphasised, but also on the downside."

He said if people spent money they had saved that would increase demand and the economy could be "firing on all cylinders" by the spring as Haldane predicted.

But he added: "If we were to get a return of variants of Covid which caused necessarily restrictions to be put in place again that would have the other effect."

With the MPC meeting this week to set monetary policy Bailey said he was more positive than before but with a large dose of caution. The BoE is still looking at the option of negative interest rates if needed, he added.

"This Covid effect on the economy is huge so what we are saying on the recovery is the economy will get back by the end of this year to where it was at the end of 2019. That's good news but let's be realistic: it's no more than getting back to where we were pre-Covid."

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