Most of the causes of high inflation cannot be controlled by a change in interest rates, a member of the Bank of England’s monetary policy committee has said.
Speaking to students at the University of Glasgow today, (November 23), Jonathan Haskel said: “Around 62 per cent of inflation deviations from target is due to outside forces that are difficult for a central bank to control in the short run.”
He outlined how 24 per cent of the deviation was due to food and energy costs, 13 per cent due to taxes, and the remaining 25 per cent due to sharp exchange rate movements and imported prices.
Haskel, who is a professor of economics at Imperial College, said these were problems the Bank of England could not solve.
“Central banks cannot grow more food, supply more gas or make the wind blow stronger," he said.
Haskel said that although monetary policy could try to offset these issues, it would likely have no impact on the fundamental baseline effects.
“Inflation will be determined in part by shocks to energy and import prices. But these are often independent of domestic economic conditions."
He added the central bank could try sharply raising interest rates, for example in response to a significant increase in oil prices, which may provide a "modest cushion" against a jump in the inflation rate through a stronger pound.
“But any real reduction in UK activity stemming from the rise in interest rates will have little to no impact on the fundamental global supply imbalance underlying the energy price change," he added.
Inflation has consistently exceeded the Bank of England’s 2 per cent target since May this year, and in October the figure hit 4.2 per cent, its highest level in a decade.
But despite this the MPC confounded markets earlier this month by deciding not to raise interest rates from their historic low of 0.1 per cent.
The majority of the MPC preferred to hold off on a potential rates rise at the last meeting because there was “value in waiting for more information” on the impact of the end of the furlough scheme on the labour market.
These figures have now been released, showing a rise in employment levels after the end of the furlough scheme.
Experts now expect interest rates to rise at the next MPC meeting on December 16.
Haskel reiterated that the labour market would be “crucial” to understanding the inflation process.
“Even though much of the current inflation is due to outside forces such as energy prices, the labour market is tight and we have to be vigilant.
“In my view, if the labour market stays tight, [the] bank rate will have to rise.”
The MPC member added that in his view, the prospective rise in the bank rate was not a “bug”, but a “feature”.
“It reflects the success of the policies, mostly fiscal, health and science that have supported the economy over the pandemic.”
sally.hickey@ft.com
