Bank of England sounds alarm on hitting inflation target
The Bank of England’s chief economist, Huw Pill, has warned that the UK’s persistently high inflation will not necessarily fall quickly, even as demand slows.
The judgement of the interest-rate-setting Monetary Policy Committee (MPC) has switched from high inflation being associated with demand factors, to price rises being more influenced by supply factors, Mr Pill said during a Bank presentation.
“We can be less sanguine about the idea that the slowing of demand, the slowing of activity that we are seeing, will lead to inflation returning to target,” he said.
This week the MPC voted by six votes to three to hold the benchmark interest rate at 5.25 per cent for a second month in a row.
MPC member Jonathan Haskel said failures in the UK’s labour market, which meant it was not working as well as it should, could keep interest rates high.
Mr Haskel said the ability of the labour market to match workers with vacancies appeared to have deteriorated.
“With an impaired labour market, interest rates would have to remain higher for longer than would otherwise be the case,” he added.
The Bank also warned that regulators need to make sure that banks operating in the UK retain adequate financial buffers as technological advances are increasng the risk of bank runs.
Determining appropriate levels of bank reserves was a challenge, Andrew Hauser, the Bank’s director of markets said.
Regulators worldwide have since been grappling with the risk of bank runs as the digital era accelerates.
Earlier this year, some regional US banks and Credit Suisse suffered massive deposit runs, causing some to fail and regulators to intervene to halt a wider crisis.
The sudden collapse of US lender Silicon Valley Bank in March surprised officials as customers rushed to empty their accounts using online banking services.
Mr Hauser said central banks also needed to judge whether balance sheets should rest after expanding hugely over years of bond-buying. He said it would be unwise for them to shrink balance sheets too far.
