BoE's Andrew Bailey warns against overreaction to rising inflation

Policymakers must not overreact to a “temporary” growth in inflation , Bank of England Governor Andrew Bailey said on Thursday, dispelling speculation he would move towards tightening monetary policy and triggering sterling weakness on the foreign exchanges. While Mr Bailey said that the recent rise in UK inflation to slightly above 2 per cent was due to rising energy prices and shortages amid easing coronavirus restrictions, Chancellor of the Exchequer Rishi Sunak set out a blueprint for building the world’s “most advanced” financial sector, after Brexit severed the City of London financial district from the European Union. “The economy is bouncing back rapidly, which is good news. With that has come a rise in inflation, and we expect that rise to continue in the near term as we go through the rest of this year, such that [consumer price inflation] is expected to pick up further above the target, owing primarily to developments in energy and other commodity prices”, Mr Bailey said in a speech on Thursday at Mansion House, the official residence of the Lord Mayor of London. “It is important not to overreact to temporarily strong growth and inflation, to ensure that the recovery is not undermined by a premature tightening in monetary conditions.” UK inflation jumped to 2.1 per cent in May, its highest level since before the Covid-19 pandemic began, as much of the economy reopened from lockdown. A surge in fuel costs and rising clothing prices helped drive up the Consumer Price Index, with inflation now above the Bank of England’s 2 per cent target. M Bailey said it was important that the BoE tracks the outlook for inflation "very carefully", particularly for "signs of more persistent pressure and for a move of medium-term inflation expectations to a higher level”. His remarks brush aside concerns raised by former BoE chief economist Andy Haldane on Wednesday. As he stepped down from his role Mr Haledene urged policymakers to act before inflation takes hold. While Mr Haldane sees prices rising close to 4 per cent by the end of the year, Mr Bailey reiterated the bank’s forecast for inflation to peak at 3 per cent and then fall back toward the central bank’s target next year. Although the economy is rebounding quickly from the pandemic now, he expects slower growth next year. “Our current view is that the economy will revert to the lower average underlying growth rates that we have seen since the financial crisis,” Mr Bailey said. The UK currency edged 0.2 per cents lower to $1.3796 and slipped 0.1 per cent against the euro to 85.85 pence following Mr Bailey's dovish comments on the interest rate outlook. Elsewhere, Mr Sunak unveiled his "ambitious vision" for Britain's largest tax-raising industry with plans to reform capital markets, seek closer ties with advanced and emerging financial centres and boost opportunities for green investment. “Financial services don’t just generate prosperity at home. They give us the economic power to project our values on the global stage”, Mr Sunak said. In his speech, he said the Treasury’s vision is shaped around four key themes: an open and global financial hub; a sector at the forefront of technology and innovation; a world leader in green finance, and a competitive marketplace promoting effective use of capital. “More open, more competitive, more technologically advanced, and more sustainable – that is our vision for financial services. The Roadmap we are publishing today sets out a detailed plan for the next few years – and I look forward to delivering it, together.” Since leaving the EU, the UK has launched several reviews and consultations aimed at making Britain a more attractive destination for finance firms. Brexit has prevented UK financial firms from having ready access to European markets , and although a memorandum of understanding on financial services with the bloc was reached in March, the EU has said indicated it is in no rush to grant “equivalence” findings that would restore the ability of British firms to trade more freely in the bloc. This means Mr Sunak must tighten the UK financial sector's ties with other nations. On Wednesday, the Treasury announced fresh regulatory co-operation with Singapore to boost trade, investment and information-sharing, and increase collaboration on FinTech and green finance. Under the UK’s green ambitions for the sector, Mr Sunak unveiled plans to require companies, pension schemes, financial services firms and their investment products to report on the impact they are having on the climate and environment - as well as the risks and opportunities facing their businesses. The new integrated Sustainability Disclosure Requirements, which will streamline existing climate reporting requirements and ensure consumers and investors can make informed investment decisions, will see the government legislate to deliver this and set out its approach to green finance regulation ahead of the Cop26 environmental summit in Glasgow in November. “With over 70 per cent of people saying they want their investments to avoid harm and achieve good for people and the planet, the government will also work with the Financial Conduct Authority to create a new sustainable investment label - a quality stamp - so that consumers can clearly compare the impacts and sustainability of their investments for the first time”, the Treasury said. The Treasury will also deliver its first ever sovereign green bond, known as a green gilt, later this year, and a world-first green savings bond offered by National Savings & Investments (NS&I), under the UK Government Green Financing Framework. Green projects such as zero-emissions buses, offshore wind and schemes to decarbonise homes and buildings will be eligible for funding, with at least £15 billion ($20.8bn) of green gilts issued this financial year, the Treasury said.

BoE's Andrew Bailey warns against overreaction to rising inflation

Meanwhile, UK Chancellor Rishi Sunak outlines blueprint to build world's 'most advanced' financial sector