Bank of England divided over threat of rising inflation

With pandemic restrictions lifted, Bank of England will continue to pump money into economy despite fears of rising inflation

  • The inflation spike has spotlighted the Bank’s massive quantitative easing program, with the monetary policy committee increasingly at odds over what to do next
  • After hitting 2.5 percent in June, inflation looks set to move towards 3.5 percent or even 4 percent in the coming months — well above the bank’s 2 percent target.
  • That has caused headaches among bank and treasury officials, who fear higher inflation will increase the cost of paying off Britain’s £2.2 trillion mountain of debt.
  • The debate is a tricky one as pulling support too soon could hurt the UK’s economic recovery from the coronavirus

The Bank of England plans to keep pumping money into the economy despite fears of rising inflation.

With pandemic restrictions lifted, the UK is recovering quickly and is on track to expand by 7 percent this year – the strongest growth rate since World War II.

But inflation is also on the rise and after hitting 2.5 percent in June, it looks set to move towards 3.5 percent or even 4 percent in the coming months – well above the Bank’s 2 percent target.

Decision term: Bank governor Andrew Bailey has argued recent price hikes are ‘transient’

That has caused headaches among bank and treasury officials, who fear that higher inflation will increase the cost of paying off Britain’s £2.2 trillion mountain of debt.

And the inflation spike has thrown the spotlight on the Bank’s massive quantitative easing program, with the Monetary Policy Committee (MPC) increasingly at odds over what to do next. The debate is a tricky one, as pulling aid too soon could hurt the UK’s economic recovery from the pandemic. The bank’s QE brings money into the economy through bond purchases, injecting cash into debt markets and helping struggling companies survive.

It sets the stage for another exciting meeting of the MPC this week – although observers believe the Bank will continue to print until QE reaches £895 billion in December.

Some members of the MPC, which is responsible for controlling inflation through interest rates and QE, fear the program could overheat the booming economy.

At the latest meeting, the bank’s former chief economist Andy Haldane sounded the alarm and called for the remaining QE program to be reduced in scope.

And since then, committee members Michael Saunders and Dave Ramsden have also expressed concerns.

Saunders said last month it might be appropriate to end QE “pretty soon”, while Ramsden warned inflation could hit 4 percent this year.

But they will likely be in the minority. Other members — including banking governor Andrew Bailey — have argued that recent price increases are “transient.”

It is also thought that some may be hesitant to act now as the bank is only £58bn short of its £895bn QE target, having already spent £837bn buying bonds with newly created money.

Advertisement

.