By Ian McConnell
Bank of England chief economist Andy Haldane yesterday flagged a risk the inflation "tiger" proves "more difficult to tame", requiring monetary policymakers to act "more assertively" than markets expect.
He said: “[Economist] Friedrich von Hayek once referred to inflation control as akin to trying to catch a tiger by its tail. That metaphor seems apt today. For many years, the inflationary tiger slept. The combined effects of unprecedentedly large shocks, and unprecedentedly high degrees of policy support, have stirred it from its slumber. In this environment, the tiger-taming act facing central banks is a difficult and dangerous one.”
Central banks unleashed huge monetary stimulus measures amid the plunge in economic output triggered by the coronavirus pandemic and associated lockdown measures and restrictions.
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In the UK, base rates have been cut to an all-time low of 0.1 per cent. And the Bank of England has provided major monetary stimulus by ramping up its quantitative easing programme, implemented largely through purchases of UK government bonds. The bank has now accumulated £895bn of assets, comprising £875bn of UK government bonds and £20bn of non-financial, investment-grade corporate bonds, under the QE programme which began more than a decade ago in response to the global financial crisis.
Mr Haldane observed that the “inflationary backdrop in the recent and distant past has been a benign one, in the UK and globally”.
He added: “Since the 1970s, global inflation has fallen steadily. Having averaged around 10% in the 1970s and 1980s, it fell to around 5% in the 1990s, just below 3% in the 2000s and around 2% in the 2010s. After the Great Inflation of the 1970s, low inflation has, within a generation, become an entrenched norm among developed and emerging market economies alike.”
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Mr Haldane noted that, in spite of “large shocks” such as the global financial crisis. Brexit and Covid, inflation had “remained stable at levels considered to be around optimal”.
He said: “While success has many fathers, a significant contributor to this fall in global inflation has been the widespread adoption of inflation targets by central banks.”
Looking ahead, Mr Haldane said: “Inflation is the tiger whose tail central banks control. This tiger has been stirred by the extraordinary events and policy actions of the past 12 months.
“It is possible that, as vaccinations are rolled out and some degree of normality returns, inflation will return to a stable state of rest. Indeed, if risks from the virus or elsewhere prove more persistent than expected, disinflationary forces could return.”
He added: “But, for me, there is a tangible risk inflation proves more difficult to tame, requiring monetary policymakers to act more assertively than is currently priced into financial markets. People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely. But, for me, the greater risk at present is of central bank complacency allowing the inflationary big cat out of the bag."
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