In a speech and interview with the Institute for Government, Andy Haldane said people and businesses have developed a “culture of dependence around cheap money” and the threat of rapid price increases ” was increasing rapidly ”.
“If that risk came true, everyone would lose out,” said Haldane. “Central banks with failed mandates facing an economic drag, businesses and households facing a higher cost of borrowing and living, and governments facing rising debt servicing costs. ”
The chief economist, who is leaving the Royal Society of Arts, directly contradicted the BoE’s monetary policy thinking, which is based on the belief that recent price increases are temporary and will soon moderate.
“I think that’s the lesson for me from our history. . . is that inflation always starts locally and starts to watch [as if it is] temporary, but that often. . . is the thin end of a thick wedge, ”he said. “Localized price pressures turned into widespread price pressures and these temporary price spikes turned into more persistent price increases. “
“It’s an evolutionary process, which we have seen time and time again throughout history,” he added. “The key to policy policy is to nip this process in the bud. “
Haldane said he expects inflation to be close to 4 percent, double the BoE’s target, by Christmas.
Searching for an English football metaphor as to why, he said there were “three lions making the economy roar” as the Covid-19 crisis fades away.
The first was the opening of the economy as restrictions on coronaviruses are lifted, which has already sparked an economic rebound that would accelerate if the government lifts the final restrictions on July 19.
Added to this was a very powerful fiscal and monetary response, said Haldane, which was likely to generate more demand than needed to generate a post-crisis recovery and “added significant additional momentum to an already rebounding economy. quickly ”.
The third driver of growth was the spending of private sector savings that individuals and businesses had accumulated during the crisis, he said. “With public and private financial fuel injected into an already hot macroeconomic engine, 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 on the amount of quantitative easing.
Haldane acknowledged that his assessment of inflation could be wrong and that inflationary pressures could “die out” as the rest of the BoE’s monetary policy committee expected. But he predicted that it was more likely that the MPC would soon change its mind and tighten its policy, raising interest rates more than necessary.
Speaking of other MPC members and central bankers facing increasing inflationary pressure in other economies, Haldane said, “Minds change and so does reason. . . it’s because the data moves ”.
“I would say we have to watch this space quite closely given the speed at which the ground is moving under our feet. “