Bank of England can tolerate inflation above 2% target, says Bailey
The Governor of the Bank of England has said that allowing inflation to remain above target levels for a period is “appropriate” in the face of uncertainty and weakness in the economy.
Andrew Bailey told an audience in Reykjavik, Iceland, that reacting too early to inflation concerns “may generate undesirable volatility”.
He said: “Given the context of softness in the real economy and uncertainty around the scale and duration of the shock, tolerating temporarily above target inflation to provide some support for the real economy is an appropriate way to approach the trade-off.
“But that tolerance would weaken if signs of second-round effects begin to emerge.”
The Government has given the central bank a target rate of 2% for consumer price inflation, with rate-setters at the Bank able to use monetary policy to help bring inflation sustainably down the this level.
At the Bank’s latest meeting in April, the Monetary Policy Committee (MPC) voted to keep interest rates at 3.75% despite predicting that inflation will increase in the coming months.
Inflation was most recently recorded at 2.8% in April, according to the Office for National Statistics.
On Friday, Mr Bailey said inflation “is likely to go higher over this year as utility bills rise and firms pass higher costs through supply chains”.
He added: “There is nothing monetary policy can do to prevent higher energy prices from affecting businesses and households.
“For net importers of energy like the UK, the terms of trade have worsened and real incomes will fall. The shock will push up inflation, and weigh on activity.”
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