Bank of EnglandMay 18 2023

MP criticises BoE over inflation response

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MP criticises BoE over inflation response
Ben Broadbent, deputy governor at the Bank of England (Parliamentlive.tv)

An MP has criticised central banks for not acting soon enough to quell inflation.

In a Treasury committee hearing today, John Baron highlighted the issue of high inflation which has been above the Bank of England’s 2 per cent target since May 2021.

Speaking to officials from Bank of England, Baron said: “People are struggling now with trying to catch up with inflation.

“If central banks generally had been more proactive, there might be less pain out there for people.”

The rate of inflation for the 12 months to March this year was 10.1 per cent, up on the 9.9 per cent forecasted by the Bank of England and economists polled by Reuters.

Ben Broadbent, deputy governor for monetary policy at the Bank, said there was a distinction between saying the BoE had been late in responding to the events that caused inflation and saying it caused inflation.

Baron retorted there was a correlation between the two questions and highlighted how, before Russia invade Ukraine, inflation was at 6 per cent and interest rates were at 0.5 per cent. 

“I accept you cannot predict shocks. They happen. But you have to respond appropriately.”

Broadbent said the main two issues the bank was monitoring at the time were how long the pandemic shock would last, and how large would the second round effects on domestic inflation be of the huge rise in import prices.

Banking wobbles

During the evidence session the Bank’s governor, Andrew Bailey, echoed comments he made at a speech earlier in the week, saying there was no link between quantitative tightening and the turmoil in the banking sector seen in recent months.

“I don't think there is any connection between market conditions and credit conditions in the UK,” he said. 

In a speech this week (May 17), Bailey claimed the UK was facing a wage-price spiral.

“Some of the strength in core inflation reflects the indirect effects of higher energy prices,” he said in his speech.

“But it also reflects second-round effects as the external shocks we have seen interact with the state of the domestic economy.”

As headline inflation falls, he said, these second-round effects are unlikely to go away as quickly as they appeared.

Bailey said the indicators of future inflationary pressures had been mixed recently.

“There are signs that the labour market is loosening a little,” Bailey said. But he acknowledged the easing was happening at a slower pace than the Bank expected. 

He said the Bank expected inflation to sit just below 2 per cent within two to three years.

sally.hickey@ft.com