BOE’s Haldane: Risks to UK Inflation Skewed up Rather Than Balanced

26 February 2021

By David Barwick – FRANKFURT (Econostream) – The Bank of England's prevailing assessment of the risks to its medium-term inflation outlook as being balanced may not be correct, Chief Economist Andy Haldane said Wednesday.

In a speech given online and posted to the website of the BOE, Haldane noted that the MPC viewed as subject to large but balanced risks its central scenario calling for domestic inflation, after a ‘rapid change’ over the next 12 months, to subside to and then persist around its target level.

That the risks to this scenario are considered large ‘is fully justified by the high degrees of uncertainty that exist around the forces driving inflation in future’, he said. ‘But given likely trends in these factors, my judgement is that the risks to inflation in the UK are skewed to the upside, rather than being balanced.’

‘Certainly, there are good grounds for believing future inflation may behave very differently than in the past’, he continued. ‘My judgement is that we might see a sharper and more sustained rise in UK inflation than expected, potentially overshooting its target for a more sustained period, as resurgent demand bumps up against constrained supply.’

Haldane observed that global financial markets had started taking on this view lately, as reflected by rising measures of inflation expectations.

The tiger of inflation ‘has been stirred by the extraordinary events and policy actions of the past 12 months’, he said.

While stable behaviour or even disinflation cannot be ruled out, he said, ‘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’, he added. ‘But, for me, the greater risk at present is of central bank complacency allowing the inflationary (big) cat out of the bag.’