In a speech, delivered at the Annual Dinner of the Society of Professional Economists, Andrew Bailey, Governor of the Bank of England, He said that the monetary policy response, if necessary, to inflationary pressure should involve interest rates and not QE.
“The rate of recovery has slowed in recent months and that slowdown continues. In relation to the fourth quarter of 2019, according to the latest data to July, the level of GDP was 3.5% lower ”.
“Having been well below the target last year and this year, it has risen quickly above 3.2% in August. Much of the latest increase reflects last year’s base effects, but we’ve also seen unusually strong increases in some items, including some groceries, used cars and lodging. “
“Our forecast in August had inflation rising to 4% at the end of this year, and developments since then mean that inflation is likely to rise slightly above 4%. The main contributors to the further increase are not the base effects, but the strength we are seeing now in the prices of goods and energy ”.
“When considering how to use monetary policy, it is also important to understand the nature of the shocks that are causing higher inflation. The shocks we are seeing are restricting supply in the economy in relation to the recovery in demand (…) the tightening of monetary policy could make things worse in this situation by putting more downward pressure on a weakened recovery of the economy ”.
“Monetary policy should not respond to supply shocks that are not generalized due to their impact on inflation expectations.”
“But this whole group was of the opinion that the monetary policy stimulus enacted in response to Covid would have to begin to relax at some point, that the relaxation should be enacted by an increase in the Bank Rate and, if appropriate, there would be no need to wait. the end of the current asset purchase program. “