Bank of England chief economist Andy Haldane warns of “nasty” inflation that could cause debt costs to spiral out of control
The Bank of England needs to focus on inflation to keep the UK’s debt costs from spiraling out of control, the chief economist said.
Andy Haldane said the bank was “very vigilant” about a possible rise in inflation due to the huge government spending and the quantitative easing of the economy.
The 53-year-old told Bloomberg: “The last thing the world needs right now is a nasty inflation surprise.”
The Bank of England’s chief economist Andy Haldane said government spending levels and quantitative easing had made the bank “very vigilant” over a possible spike in inflation
Britain is now extremely vulnerable to spikes in inflation as its national debt climbs above 100 percent of GDP to its highest level since the early 1960s.
If the bank raises interest rates to keep inflation down, the cost of servicing that debt will skyrocket and threaten the UK’s recovery.
Haldane said the bank is ready to allow inflation to temporarily exceed its 2 percent target, especially if it’s due to temporary effects such as changes in VAT, oil prices or the exchange rate.
He said: “We would be very vigilant if so much monetary and fiscal stimulus had been introduced into the system that it would no longer be reflected in the medium term.
“What can even appear as a temporary effect when it affects expectations can easily be included.
“We’re not there at the moment, but it’s definitely a risk that we have to deal with.” The economist, who recently predicted that consumers would see pandemic savings of £ 100 billion and fuel the recovery, said he was confident about the economy in the second half of 2021 thanks to coronavirus vaccines.
Consumers have happily switched their spending from vacation, commute, and dining to couches, DIY kits, and online streaming subscriptions.
An explosion in spending could drive prices up and force central bankers to act quickly.
The prime rate has been at record lows since the financial crisis and has hit savers, but has blessed those with mortgages and debt.
Haldane added, “If this year has taught us anything, we have to be very sensitive and be very responsive to the data.
“Is this more like the aftermath of a financial crisis – slow and steady – or more like the aftermath of the 1918 flu pandemic or a world war that caused a much faster release of pent-up demand?”
Figures from the Institute for Fiscal Studies show that middle-class families had an additional £ 350 per month on average in their bank accounts between March and September this year.
However, the poorest households were doing £ 170 a month worse as the pandemic resulted in layoffs in low-paying sectors like hospitality and retail.