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Howard Flight: Time for the Bank of England to take its foot off the gas

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Howard Flight: Time for the Bank of England to take its foot off the gas

Lord Flight is chairman of the Flight & Partners Recovery Fund, and was former shadow chief secretary of the Treasury.

The Bank of England and the Treasury were correct in adopting stimulating Keynesian measures when the Covid bomb hit. The economy stayed afloat, where otherwise there would probably have been an economic collapse.

As Andy Haldane has argued, it is now quite clear that the time has come to begin phasing out these stimulant measures, as failure to do so poses a dangerous risk of rising inflation that could force the Bank of England to put a handbrake on. economic. turn ‘to reign sharply in flexible monetary policy.

However, it is always difficult to “give up the opium”. The danger is that the bank will continue to expand the money supply / QE, with negative interest rates and rising inflation. It certainly appears that Haldane got it right and Andrew Bailey and the Bank of England got it wrong.

The time has come to start tightening monetary conditions (although not aggressively) and reducing the emergency stimulus to keep inflation under control.

It appears that the Monetary Policy Committee (MPC) is preparing to reduce the emergency stimulus. The House of Lords Committee on Economic Affairs Report – “Quantitative easing – a dangerous addiction” – has had a significant impact on the MPC and the market. It’s reasonable that the bank doesn’t want the economy to shrink, but inflation is the result of too much money chasing too few goods, which seems like this is where we are at.

The Bank of England argues that the current rise in interest rates towards the three percent expected next year is caused by transitory factors, especially the global rise in oil prices, although increases in oil prices have been a of the main causes of inflation over various cycles. of the last 30 years. The Bank of England Report did not mention the recent surge in UK money growth. CPI inflation has already risen to 2.5 percent in June and will continue to rise in the coming months; and prices are now going up, for example, the revision of rail fares.

The Bank of England Report did not mention the recent increase in money growth or measures of money supply conditions in the MPC policy statement. The MPC is still planning further stimulus by completing the £ 150bn purchase of gilts under the QE policy.

The economic recovery and the rebound in inflation have been stronger than expected by the MPC or the Bank of England. Given that conditions have changed, policy should also change, and it is clear that injecting more stimulus now may be unwise. It’s time to end QE next month and the reduction applies to purchases. A relatively modest and managed tightening should not derail the economic recovery. In fact, it should offer a more sustainable recovery. As Haldane has made so clear, now is the time for a smooth change of direction.

The Bank’s response has been that it has been important not to overreact; the British economy has not yet fully recovered and the price jump has been caused by bottlenecks and Covid distortions; they are not permanent.

Bailey has made it very clear that he does not want the bank to react to what he identifies as temporary strong growth and inflation, in order to ensure that the recovery is not undermined by premature adjustment. He expects the rise in inflation to more than three percent next year to be temporary. But it is not enough to expect inflation to return to two percent in two years, if it reaches five percent first. The fact is that the economic recovery and the rebound in inflation have been stronger than the MPC expected when it made the decision to expand QE last year.

Bailey expects the rise in inflation to be temporary and says his reasons are sound and well founded. Haldane believes that the economy has already returned to its pre-Covid size and is therefore at increasing risk of overheating.

The danger is that inflation will rise to more than three percent by the end of this year, where Bailey claims that this is only temporary and that the bank should not react by adjusting, cutting QE or raising interest rates and that it should continue to stimulate the economy. You are likely to meet widespread skepticism in the markets. His recent “good news” was that the economy is only five percent smaller than 18 months ago, and that the gap is closing fairly quickly. If so, it is a good reason to phase out expansionary measures.

My money is on Haldane and now I am starting to adjust smoothly. With the scope of required interest rate service, it will be crucial to keep interest rates as low as possible.

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