Bank of England warns it will act to contain inflation risk

Bank of England Governor Andrew Bailey suggested the British central bank is preparing to raise interest rates for the first time since the start of the coronavirus pandemic as inflation risks mount.

Mr Bailey said he believes the recent jump in inflation would be temporary, but that a surge in energy prices would push it higher and make its climb last longer, increasing the risk of higher inflation expectations.

"Monetary policy cannot solve supply-side problems, but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations," he said during an online panel discussion organised by the Group of 30 consultative group.

"And that's why we at the Bank of England have signalled, and this is another such signal, that we will have to act. But of course that action comes in our monetary policy meetings."

The Bank of England has forecast that Britain's inflation rate will rise to more than 4 per cent, more than double its target, as the world economy reopens from Covid-19 lockdowns, causing shortages of supplies and staff, and the price of energy soars.

The central bank governor's comments follow a warning from the International Monetary Fund last week that called on regulators to be on guard about the risks from rising inflation.

Central banks should “remain vigilant about the possible inflationary effects of recent monetary expansions because their balance sheets have reached historically high levels in several countries and due to the concomitant effects of large fiscal stimulus during the Covid-19 pandemic", the IMF said.

Inflation in advanced economies is forecast at 2.8 per cent this year, while it is projected at 5.5 per cent in emerging market and developing economies. Global food prices have increased nearly 40 per cent since the start of the pandemic, presenting serious implications for low-income countries, according to the fund.

Central banks should “refrain from asset purchases if they operate under weak independence and in the context of high inflation and precarious fiscal positions,” the IMF said.

Investors have speculated that the Bank of England could become the first of the world's biggest central banks to raise rates, later this year or early in 2022.

Mr Bailey said demand for workers in Britain was stronger than expected and the number of younger and older workers leaving the labour market had grown.

"I do have concerns about labour supply growth," he said.

But he said he did not believe there was a "general pattern of labour market pressure" as wages increased strongly in some sectors but less so in others.

He also said there were lessons for governments seeking to prevent future supply chain shocks in the way financial regulators responded to the global financial crisis of 2007-2009, including regular stress tests.

"I'm not saying we have the magic answer to supply chains across the board, but I think there are lessons that we have learnt in terms of resilience that can usefully be adapted and used and translated into some other markets, particularly, for instance, when I look at energy supply," he said.

The UK, the world's fifth-largest economy, is expected to expand 6.8 per cent in 2021 after shrinking 9.8 per cent last year, according to IMF estimates.

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