The Bank of England’s chief economist left his job on Wednesday with a blast at his fellow central bank rate-setters for underestimating the growing risk of a dangerous inflation surge in the UK.
In a speech and interview with the Institute for Government, Andy Haldane said people and companies had developed a “dependency culture around cheap money” and the threat of a rapid increase in prices was “rising fast”.
“If this risk were to be realised, everyone would lose,” Haldane said. “Central banks with missed mandates needing to execute an economic handbrake turn, businesses and households facing a higher cost of borrowing and living, and governments facing rising debt-servicing costs.”
The chief economist, who is leaving to run the Royal Society of Arts, directly contradicted the BoE’s monetary policy thinking, which is based on a belief that recent rises in prices are temporary and will soon moderate.
“I think the lesson for me from our history . . . is that inflation always starts localised and starts looking [as if it is] temporary, but that often . . . is the thin end of a thick wedge,” he said. “Localised price pressures turned into generalised price pressures and those temporary spikes in prices morphed into more persistent rises in prices.”
“That’s an evolutionary process, that we’ve seen time and again through history,” he added. “The key takeaway policy-wise is to nip that process in the bud.”
Haldane said he expects inflation to be close to 4 per cent, double the BoE’s target, by Christmas.
Reaching for an England football metaphor to explain why, he said there were “three lions causing the economy to roar back” as the Covid-19 crisis fades.
The first was the opening up of the economy as coronavirus restrictions are lifted, which has already caused an economic rebound that would accelerate if the government removes the final restrictions on July 19.
Added to this was a very powerful fiscal and monetary response, Haldane said, which was likely to generate more demand than needed to generate a recovery from the crisis and was “adding significant further momentum to an already rapidly bouncing-back economy”.
The third motor of growth was the spending of private sector savings that people and businesses had hoarded during the crisis, he said. “With public and private financial fuel being injected into a macroeconomic engine already running hot, the result could well be macroeconomic overheating.”
Earlier this month Haldane voted against the majority on the BoE’s Monetary Policy Committee for the second meeting in a row, arguing for a lower limit to the amount of quantitative easing.
Haldane acknowledged that his inflation assessment could be wrong and that inflationary pressures could “fizzle out” as the rest of the BoE’s Monetary Policy Committee expect. But he predicted it was more likely the MPC would soon change its mind and might have to tighten policy, raising interest rates by more than otherwise needed.
Speaking about other MPC members and central bankers facing rising inflationary pressure in other economies, Haldane said “people’s minds are moving and the reason . . . is because the data is moving”.
“I would say watch this space pretty closely given how quickly the ground is moving beneath our feet.”