The Bank of England’s outgoing chief economist has warned that UK inflation could surge to four per cent this year.
Andy Haldane said in a speech today that he expects “UK inflation to be nearer four per cent than three per cent. This increases the chances of a high inflation narrative becoming the dominant one, a central expectation rather than a risk.”
The latest UK CPI shows inflation is currently above the Bank of England’s two per cent target.
Prices rose 2.1 per cent annually in May, the highest increase for two years, while figures released today also show Eurozone inflation reached 1.9 per cent in June.
Haldane suggested that “inflation expectations at all maturities would shift upwards, not only in financial markets but among households and businesses too.”
He warned that monetary policy could soon be facing a “Minsky Moment”, a theory that a sudden collapse in asset prices often occurs after periods of high growth and speculative activity fuelled by low borrowing costs.
“This would leave monetary policy needing to play catch-up to re-anchor inflation expectations through materially larger and/or faster interest rate rises than are currently expected” he added.
Haldane has argued in the past that ultra-loose monetary policy was the right immediate response to the pandemic to ensure the damage inflicted on the economy was limited.
However, he now suggests stimulus measures should be reined in given the pace of the UK’s economic recovery.