Rising inflation poses challenge for central bank

Dilemma over next policy moves risks dividing decision-makers in Britain

The Bank of England is set to unveil the biggest price shock for more than a decade this week, after its latest monetary policy report revealed that its inflation estimate in May for the final quarter of the year was significantly below the real figure.

The Daily Telegraph reports that rather than 2.5 percent as predicted in the spring, the figure will be closer to 4 percent, which is likely to cause a split among the central bank's policymakers on what is the best next step to take for the United Kingdom economy.

The bank is scheduled to make a policy announcement this week over its latest next move, and the future of its economic stimulus program.

Governor Andrew Bailey has said rising inflation is only a temporary concern, but Deputy Governor for Markets and Banking Dave Ramsden and Monetary Policy Committee member Michael Saunders have expressed greater fears.

In a speech made during an online seminar on July 15, Saunders said: "If activity and inflation indicators remain in line with recent trends and downside risks to growth and inflation do not rise significantly (and these conditions are important), then it may become appropriate fairly soon to withdraw some of the current monetary stimulus in order to return inflation to the 2 percent target on a sustained basis."

The gradual easing of lockdown over the last few months has led to increased economic activity, pushing up prices.

In addition, this month the furlough job support program continues its journey toward being wound down, currently scheduled for the end of September, with employers expected to pick up more of the bill for paying employees' wages as from the start of August.

Another member of the monetary policy committee, Gertjan Vlieghe, was quoted by the Guardian newspaper as expressing doubts about the wisdom of raising interest rates to counteract inflation.

"We are not out of the woods yet in terms of the virus and the impact on the economy. Yes, the economy has been growing rapidly, but on the most recent data it remains an average recession away from full employment," he said in a speech at the London School of Economics.

Sanjay Raja, senior economist at Deutsche Bank, said the impact of the vaccine program meant now was a good time for a reappraisal of Bank policy.

"With the economy now fully open and vaccine effectiveness proving its mettle, the balance of risks around the health outlook lean toward some removal of emergency pandemic policy support over the next year," he said.

With regard to the debate over inflation, he continued, "we think Bank expectations may be underestimating the scale of inflationary pressures — both in terms of peak and persistence".

George Buckley, chief economist at Nomura, told the Telegraph that price growth could reach as high as 3.8 percent by the end of the year, which would be the biggest jump in a forecast figure from the Bank since August 2009, when the world was still dealing with the aftermath of the global economic crisis.