How the Bank of England lost control of inflation Business

First, interest rates here would have little impact on the global pressures that have exploded. Changing UK tariffs would not solve global supply chain problems, for example, or spare UK households and businesses from soaring energy prices on international markets.

“We have been hit with a very big shock, which is a shock from the outside,” Bailey told MPs in February. “There is nothing we can do to compensate for this shock.”

Second, the MPC had to wait to see what happened with the furlough, which only ended last October. With around 1 million people still using the job retention scheme, it was then not clear that unemployment would continue to fall back to the pre-Covid low of 3.8%, as has happened over the the three months preceding February.

“Looking back, you can barely see that in the labor market data,” Bailey said in February. But when he voted to keep interest rates at 0.1% in November, “significantly more jobs were using the furlough scheme to its end state than expected”, raising concerns about high unemployment. scale.

And third, interest rates only affect inflation with a lag: to have a big impact on inflation now, the Bank would have had to tighten policy in the teeth of the first lockdown – an unrealistic proposition being given that the country was in its deepest recession in centuries. .

In February, Broadbent said that acting early enough to contain inflation now would have required the Bank to forecast soaring gasoline prices 18 months in advance, “and raise interest rates in full middle… of the first wave of the pandemic and the lockdown.

The consequences of this could well have been far worse than the pain of high inflation, he argued.

“Because of the inevitable nature of the real income consequences, it wouldn’t have improved real income now,” he said. “In order to keep inflation close to target, even assuming we had that foresight and tightened policy very aggressively in the middle of 2020, the means by which we would have brought inflation down would have implied much lower wage growth and higher unemployment.”

But the Bank has now started raising rates, three times so far, taking the base rate from 0.1pc to 0.75pc.

Financial markets are expecting more, with rates heading for 2% by the end of the year and 2.5% by next March.

However, economists fear that by waiting so long, the Bank will now have to respond with rapid rate hikes – to the detriment of the economy.

“This puts the Bank of England in a difficult position – balancing growth and inflation,” says Paul Hollingsworth of BNP Paribas.

“We believe that for the time being, inflation concerns will dominate and today’s data gives us even more confidence that the MPC will raise rates again in May.”

This threat to growth has been precisely Haldane’s concern for the past year.

As he warned, failing to raise rates in time means “policy must be tightened more than expected, leading to future job and income losses.”