The Bank of England vows to keep rates higher for longer as it fights persistent inflation, but it seems to be having a tougher job getting price growth down than many other central banks. Recent output data shows a vulnerable economy struggling on several fronts. Read more at
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Stubborn UK inflation puts Bank of England in a bind
Inflation in the United Kingdom has proved to be stubbornly high, leaving policymakers at the Bank of England (BoE) in a difficult position. Price pressure has persisted for longer than expected, complicating the central bank’s efforts to steer the economy towards a sustainable recovery.
The latest data from the Office for National Statistics (ONS) reveals that UK inflation reached a nine-year high of 5.4% in November 2021. This surge in prices is primarily driven by factors such as rising energy costs, supply chain disruption, and increased wages in certain sectors. These factors, coupled with the dovish monetary policy stance adopted by the BoE during the pandemic, have resulted in a stronger inflationary environment.
The Bank of England understands the need to balance the risks associated with inflation and its impact on households with the broader objective of maintaining economic stability. However, reigning in inflation remains a challenge as it threatens to erode the purchasing power of consumers and erode the affordability of essential goods and services. Moreover, higher inflation can also lead to expectations of further price increases, creating a self-perpetuating cycle of inflationary pressure.
Traditionally, central banks would respond to high inflation by raising interest rates. However, the BoE finds itself in a bind due to the fragile state of the post-pandemic recovery. Tightening monetary policy too soon could risk derailing the economic rebound and dampen business and consumer confidence. It is a delicate balancing act that requires the BoE to carefully navigate through conflicting objectives.
The BoE has taken a cautious approach thus far, signaling that it may tolerate inflation above the 2% target for longer. The central bank argues that much of the current inflation is transitory and expects it to ease in the coming months. Nevertheless, market participants and analysts are growing increasingly concerned that inflationary pressures could persist well into 2022, necessitating a more decisive and timely response.
The BoE’s dilemma is compounded by the fact that it has limited tools at its disposal. The scope for further quantitative easing is constrained, and with interest rates already at historically low levels, the room for maneuver is limited. This leaves the central bank heavily reliant on its communication strategies and forward guidance to influence market expectations and manage inflationary pressures.
The impact of stubborn inflation goes beyond the domain of monetary policy. It affects households facing higher prices for everyday goods and fuels discontent. Additionally, it poses a challenge to workers and bargaining power, as wages struggle to keep pace with rising living costs. Businesses also face the prospect of higher input costs, which can dampen investment and hiring intentions.
As the New Year begins, the Bank of England faces a substantial challenge in striking the right balance between supporting the economy’s recovery and bringing inflation under control. The roadmap out of this bind is uncertain, requiring the central bank to maintain a close eye on economic indicators, market sentiment, and external factors such as energy prices and global supply chain disruptions.
While the exact path forward remains unclear, it is evident that the persistence of high inflation in the UK presents a significant hurdle for the Bank of England. Policymakers must devise a strategy that not only addresses immediate concerns but also safeguards the economy’s long-term prospects. The coming months will test the central bank’s ability to navigate this challenging environment successfully.
Welcome to Net Zero.
The lunatic power companies are still bouldering on with their cash cow wind farms and the lunatic politicians aren't stopping it.
Inflation is running relatively high, though I am old enough to have experienced worse as a resident in Britain. Part of the high prices are a result of Brexit.
Thanks to brexit
Sovrinty innit.
If you break it down, the largest part of the inflation calulation, is housing, yes, higher mortgages. Reducing interest rates would reduce rents and mortgages and thus reduce that inflation number. It would also help increase consumer confidence, turning the coming depression into a mere recession.
Bank of England caused this inflation with excessive money printing during the “pandemic”. They love it because it devalues the government’s debt which is now unpayble and the tax payer and non asset holding public pick up the tab through inflation.
And who gets rich.. the private central bank shareholders as with every crisis.
Oh to be a Rothschild
Good for FT for critiquing the BoE's monetary policy, which is not working at all. It must lower interest rates to fire up the economy. It has misdiagnosed what has caused inflation, it is not high wages and high spending but high food prices and high executive pay.
Well, according to a former BoE official: people need to know they are poor now…