Andrew Bailey said in a speech last night to the Society of Professional Economists that rate of recovery from the pandemic had slowed over recent months, adding: “And that slowing is continuing.”
The Bank of England governor jokingly asked “when is the plague of locusts due” as he warned the economy faces “hard yards” ahead.
Bailey told the society’s annual dinner that interest rates would have to increase to slow rising prices, but said the economy was not currently strong enough to sustain that intervention.
“Pulling this together, the recovery has slowed and the economy has been buffeted by additional shocks,” he said.
“The switch of demand from goods to services, as Covid has faded in terms of its economic impact, has not taken place to date on the scale expected. Meanwhile, supply bottlenecks and labour shortages have weighed on output, and are continuing.”
The 62-year-old banker said the number of high-profile supply bottlenecks appeared to be increasing.
“I must say that when I heard that we were suffering a shortage of wind to generate power, I was tempted to ask, ‘and when are the locusts due to arrive.”
The bank’s view was that price pressures would be “transient” as demand shifted back from goods to service, global supply chains repaired themselves and commodity prices reverted to average levels, Bailey said.
“But, the pressures are very much still with us, and there is still, we believe, pass-through to retail prices to come, and manufacturers’ output prices are still rising rapidly,” he said.
“Added to that is the uncertainty around how the labour market puzzle resolves itself, and how that will affect employment and earnings.
“Meanwhile, just to remind, the recovery is weakening. A lot therefore turns on how effectively supply capacity is rebuilt and over what time, and how the labour market evolves. These are truly hard yards.”