Categories: Economy

Bank of England official concedes printing money fuelled UK inflation

A Bitter Pill: Finally! Top Bank of England official finally admits money printing – and lockdown – fueled UK inflation crisis

Covid lockdowns and the Bank of England’s pandemic-era money-printing program are partly to blame for the cost of living crisis, the central bank’s chief economist has suggested.

Huw Pill, who took on the influential role in Threadneedle Street last year, said gas prices were the main driver, with inflation around 4 percentage points, which is at a 40-year high of 10.1 percent.

But even before Russia’s invasion of Ukraine in February, which pushed gas prices up, inflation was already at 6.2 percent — more than three times the Bank’s target of 2 percent.

Huw Pill, chief economist at the Bank of England, said the pandemic-era money printing program is partly responsible for the cost of living crisis

Speaking to the House of Lords Committee on Economic Affairs, Pill admitted that the Bank played a role in driving inflation through its massive money-printing program.

Known as quantitative easing (QE), this pumped £450 billion into the economy in 2020.

Pill also blamed the massive supply-demand mismatch in the wake of Covid lockdowns for pushing the price of goods ever higher.

The comments may make reading uncomfortable for bank governor Andrew Bailey, who oversaw the explosion in QE, and new Prime Minister Rishi Sunak, who as chancellor has been central to the government’s response to Covid.

Gas prices don’t explain “all excesses” of inflation, Pill said. One factor, he said, was “past developments — including monetary policy choices.”

Warning that ‘QE and the choices about QE may have contributed’ to the rise in the cost of living, Pill added: ‘I was not at the Bank two or three years ago when some of those rounds of QE were undertaken. Whether they would be elected is an open question.’

He also suggested that lockdowns – and the support provided to households and businesses by the pandemic, such as the furlough scheme – played a role as they boosted demand at a time when supply of goods and services was hit hard.

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“Looking back at the impact of the pandemic, I think we can say that the destruction of demand was overemphasized compared to the destruction of supply,” he said.

‘The support from the macroeconomic side – both fiscal and monetary support – was very profound.’

QE was first used in the wake of the financial crisis in an attempt to mitigate the severe recession that hit the UK in 2008.

It involved buying bonds from investors — primarily government bonds known as gilts — which lowered borrowing costs and freed up cash for those investors to plow into the economy.

But critics say this has fueled demand during the pandemic by boosting buying activity while ignoring the supply problems caused by lockdowns, as businesses were forced to close their doors.

When economies reopened, there was strong demand that could not be met, pushing prices up and workers demanding higher wages.

Andy Haldane, Pill’s predecessor at the Bank, also predicted the same when he began warning early last year that inflation could spiral out of control.

Delaying efforts to tame inflation would be like “trying to catch a tiger by its tail,” Haldane said.

But other members of the Bank of England’s interest rate committee remained adamant that inflation would be “transient.”

The Bank only started raising interest rates in December last year in an effort to control inflation and has now increased it from 0.1 percent to 3 percent.

Gerard Lyons, chief economist at investment firm Netwealth and former economic adviser to Boris Johnson during his time as mayor of London, accused the Bank of making a “major policy mistake” with QE.

And Sir Paul Marshall, a veteran of hedge funds, likened QE to a drug the markets had become “addicted” to.

Jacky

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