A top rate setter at the Bank of England has today warned inflation will soar far above the Old Lady’s target and breach five per cent.
Ben Broadbent, a deputy governor at the Bank, said in a speech in Leeds “in the spring of next year… [inflation] will probably climb comfortably through five per cent, a long way north of the monetary policy committee’s two per cent target”.
Broadbent sent a strong hawkish signal underlining that the Bank is ready to tighten policy to get inflation back toward target.
“What we can do – and what is the best possible approach – is to think at every meeting about the level of interest rates that will maximise our chances, a couple of years from now, of hitting the inflation target exactly. That is what we will continue to do,” he said.
The Old lady has a mandate to keep inflation in check at two per cent. However, price rises have spiralled out of control since the Covid-19 unlocking, driven higher by supply chains creaking under the weight of red hot global demand.
An energy crunch has put a rocket under wholesale gas prices, prompting a string of British energy providers to go to the wall and the UK’s energy watchdog to hike a cap on the amount firms can charge customers, causing inflation to take off.
Prices are 4.2 per cent higher than they were a year ago, the highest rate of increase in nearly a decade, according to the Office for National Statistics.
Broadbent warned Ofgem, the energy regulator, is likely to raise the price cap again in April, the main factor driving inflation to over double the Bank’s target.
A sudden rise in demand for goods triggered by consumers ramping up spending on tangible products amid long periods of being confined to their homes and denied access to services activities has thrown a spanner in global supply chains.
“Inflation in global goods prices looks to be the result of a big shift in global consumer demand, induced by the pandemic, away from services and towards goods,” Broadbent added.
Broadbent also warned that inflationary pressures could emanate from the jobs market in the coming months, a key risk identified previously by the Bank to price rises becoming more entrenched in the UK economy.
“If wage earners’ expectations of future inflation rise… or if they seek compensation for the rises in the costs of living that have already occurred, wages could also accelerate further, even without any additional decline in unemployment.”
The Old Lady has come under intense pressure to get a handle on inflation.
Officials on Threadneedle Street stunned markets last month when they left rates unchanged at a record low 0.1 per cent despite forecasting inflation will hit five per cent next spring.
The Bank will announce its next interest rate decision on December 16.