“As a central bank you have to be brave sometimes,” says Andrew Sentance, a former rate-setter and regular critic of the Bank of England’s ultra-loose monetary policy.
The hawkish economist, who served on the Monetary Policy Committee throughout the financial crisis, has had more reason than usual for complaint lately.
The Bank of England is keeping its foot to the floor on both interest rates and money-printing, despite yet more unwelcome news on inflation. The MPC is charged with keeping the consumer prices index pegged at 2pc but minutes of its latest meeting brought a scarcely palatable combination of slowing growth and rising prices.
Threadneedle Street maintains for now the mantra that inflation will be “transitory”, although the definition of the word is becoming looser by the day. Shortages of both labour and raw materials might take “some quarters” to resolve, it warned, as record gas prices threaten an energy price shock for millions of households across Britain.
The Bank now expects inflation to reach “slightly above” the 4pc peak it predicted only a month ago and linger there until at least April next year.
The price shock poses a “significant” risk to its forecasts, but only two members voted to dab on the brakes as Sir Dave Ramsden joined Michael Saunders in voting to bring an immediate halt to its latest £150bn tranche of quantitative easing.
Interest rates also remain at just 0.1pc while inflation risks mount and the nation frets over its rising heating bills.
Still, the majority of the MPC are more concerned over the outlook for employment, and the uncertainty ahead when the Government closes its furlough scheme at the end of the month. According to minutes of their meeting, rate-setters decided there was “high option value” in waiting for more clarity on the jobs market before pulling the trigger on tighter policy.
That adds to Sentance’s frustration: “There’s just a totally asymmetric monetary policy response. When something bad is happening to the economy in terms of growth the MPC has been always very quick to reduce interest rates. And yet when something bad is happening on inflation, they are incredibly reluctant to do anything. This is something that the Treasury and the Treasury select committee should be zeroing in on.”
Admittedly, the Bank made enough hawkish noises to send sterling up 1pc, as the minutes also voiced concerns that the supply squeeze keeping Britain’s post-Covid recovery in a lower gear “would prove more persistent”.
The committee also dropped its forward guidance on conditions for tightening policy as “no longer useful”, and pointedly chose to stress that its “remit was clear that the inflation target applied at all times”.
Financial markets moved in response, bringing forward their estimations of a first interest rate rise to February next year.
But other analysts suggest increasing scepticism in markets about the Bank’s inflation credibility. Oliver Blackbourn, a portfolio manager at fund manager Janus Henderson, highlights the spike in “break-even” rates, the difference between the returns demanded by investors on conventional fixed-income bonds compared to inflation-linked government debt.
Even adjusting for the fact that “linkers” follow the higher retail prices index, investors are still demanding a 3pc premium on 10-year borrowing, high above the Bank’s inflation target. “If that hangs around, [the Bank] probably has to start taking it seriously,” he says.
The Bank insists inflation expectations – which it watches like a hawk for fear of running into rising pay demands – are well anchored, despite an unsurprising rise in households’ short-term concerns as the cost of living pushes ever higher.
“Such movements in these short-term measures would not be inconsistent with household inflation expectations remaining anchored,” the Bank said.
Krishna Guha, head of strategy at Evercore, says: “The whole game now is to hold on to inflation expectations for long enough to get visibility on the labour market, and that means maintaining a hawkish tone ahead.”
But the Bank’s own regional agents already report hints of wage pressure spreading beyond high-profile pinch points such as HGV drivers, where eye-watering pay rises of up to 40pc have become almost commonplace.
The Bank said companies “have increased pay settlements somewhat on average, with awards now typically around 2pc-3pc”. Bank staff meanwhile estimate that pay growth across the private sector is running at 4pc, above pre-pandemic rates.
This all adds to the concern that while talking tough (or at least tougher), rate-setters may be too slow to take their foot off the gas.
Blackbourn adds: “I think with the supply disruption in the UK at the moment, in terms of the labour market, you’re seeing the market express a definite level of concern about how that could escalate. The Bank of England is pretty confident it won’t, but we haven’t had a proper supply side shock like this in a long time.”
Julian Jessop, a fellow at the Institute of Economic Affairs, believes the Bank has “missed its chance” to put an end to quantitative easing and warned that Threadneedle Street would suffer a reputational blow if inflation lingers on.
Mr Jessop says: “A prolonged period of above-target inflation would add to the squeeze on real incomes and undermine the credibility of the Bank itself.”
The Bank is operationally independent but its stance is not going unnoticed in Westminster, where Treasury select committee chairman Mel Stride frets over the Old Lady’s “undercooked” inflation forecasts.
A “slightly queasy” Stride says: “It’s much better to deal with it early than to deal with the reality of it if it takes off, so much better to get in and nip it in the bud.”
If the Bank keeps its foot to the floor as inflation takes off, it will face some uncomfortable inquisitions in the months ahead.