BOE’s Tenreyro: Inflation Pick-Up Likely Due to One-Off Effects Not Sustainable

26 March 2021

By David Barwick – LONDON (Econostream) –  Recent energy price hikes mean that a pick-up in inflation would probably not be sustainable, Silvana Tenreyro, External Member of the Bank of England’s Monetary Policy Committee, said on Friday.

In an online speech for a Federal Reserve Bank of San Francisco conference, Tenreyro, according to a text of her remarks made available by the BOE, said that although the MPC clearly pursues a forward-looking inflation target, its ‘remit has also always been clear that the MPC should target inflation flexibly’, implying a need to differentiate between durable inflation increases and transient fluctuations.

‘I would not consider a pick-up in inflation to be sustainable if it was due to transitory one-off effects, which are likely given recent rises in energy prices, as well as base effects from sharp falls in inflation at the onset of the pandemic’, she said.

Production bottlenecks could constrain supply in the near term, just as fiscal measures bolster demand, she said, even if demand in the future is weaker.

‘To the extent that these effects prove temporary, they would not imply any sustained pick-up in excess demand, nor in inflation, provided inflation expectations remain anchored’, she said.

Tenreyro said that ‘[d]espite lessening downside risks’, in some scenarios she would envision ‘looser policy later this year.’

Even if joblessness is now less likely to surge, changes in working and consumption habits may depress demand in some sectors and mean that some furloughed workers do not regain their jobs, with a corresponding impact on demand, she said.

As well, a relatively slow pace of vaccination in other countries could weigh on UK exports, she said. Also, the pandemic continues to pose a threat, she suggested.

‘A delay or reversal in the relaxation of health restrictions, or renewed caution from households and businesses, would require more monetary support to help them bridge across to a period when health risks had been reduced’, she said. ‘As always, the required loosening in monetary policy would also depend on the response of fiscal policy to any renewed economic weakness.’

‘The MPC will continue to monitor the health and economic situations at home and around the world, and stands ready to take whatever action is necessary to achieve its remit’, she added.

Going forward, ‘assessing the impact of UK fiscal policy is a crucial consideration for the appropriate setting of monetary policy.’

The next round of forecasts would closely consider the UK March 2021 budget, she said, ‘but a key influence on the outlook will be the extension of the furlough scheme until the end of the third quarter, when all UK adults are expected to have been offered a vaccine.’

This reduces the risk that joblessness will surge when the furlough scheme comes to an end as well as the risk of hysteresis in the job market, she said.

Meanwhile, the latest U.S fiscal stimulus ‘also raises the global and UK outlook, given the importance of the U.S. to the world economy and as a major UK trading partner’, she said, with a positive net impact on the UK economy.

Although there are fiscal policy differences between the U.S. and UK, Tenreyro said she did ‘not see a major divergence in long-term inflation risks across countries: monetary policymakers have the tools to contain and manage those risks, and would not hesitate to use them.’

UK fiscal measures promoting investment will impact demand, she said, but would also boost future supply, ‘which may temper or reverse any inflationary pressures.’ The timing – including near-term stimulus but consolidation further out – ‘would lead to a hump-shaped impact on demand’, she said.