ALEX BRUMMER: Andrew Bailey’s warning is an alarm call from the Bank of England in perilous times
Andrew Bailey is not known for his colourful flourishes – although he did once stare down a grizzly bear at his family’s Idaho retreat.
When the normally taciturn Governor of the Bank of England wonders out loud, before an audience of senior economists, ‘when are the locusts due to arrive’ one has to be worried.
The Bank had hoped that with much of the country vaccinated and official interest rates held at the record low level of 0.1 per cent, output would be racing back to pre-pandemic levels.
When the Governor of the Bank of England Andrew Bailey (pictured) wonders out loud, before an audience of senior economists, ‘when are the locusts due to arrive’ one has to be worried
But it is not happening like that. As Bailey observes, the ‘hard yards’ are yet to come. Much economic growth has been delayed. In spite of a boom in eating out, as the public relaxes after Covid-19, there has been huge unexpected disruption.
The energy crisis is one issue. But supply chains are at breaking point in everything from timber and steel to the semiconductors that are vital to modern cars. This has caused construction and manufacturing to pause.
The message from the Bank’s own agents, who take the temperature of the regional economy, is that these bottlenecks are getting worse.
They are weighing heavily on economic expansion. And with the shortage of wind to generate power, Bailey also is starting to think that the gods are against us. The Bank now fears that its hopes of output returning to pre-pandemic levels anytime soon will be postponed.
The Bank had hoped that with much of the country vaccinated and official interest rates held at the record low level of 0.1 per cent, output would be racing back to pre-pandemic levels. Pictured: Empty shelves in a grocery store in March 2020
As if this were not enough, Bailey and his fellow interest-rate setters on Threadneedle Street have other puzzles to confront.
The jobs market is at an inflexion point with the 1.7million estimated to be on furlough in July expected to swim or sink when they come off the scheme at the end of this week. This is at a time when job vacancies stand at a record level of one million.
With so many moving parts, including the shortage of vital logistics and HGV drivers, it is all but impossible to know what the underlying picture in the labour market is and how best to set policy to avoid unemployment surging.
The other big problem is deciding whether the Bank’s forecast of 4 per cent plus inflation for this year (twice the official target of 2 per cent) is transient – as has largely been its position until now – or more persistent.
We live in perilous times and Bailey, who is not heard that often, is sounding the alarm. Such uncertainties are not the ideal backdrop for Chancellor Rishi Sunak’s (pictured) budget and multi-year spending review set for next month
With energy prices surging and competition for skilled labour exploding, it looks increasingly as if the public is expecting more inflation – which will drive higher prices. If so, the Bank will have to respond – and that will mean raising interest rates earlier than Bailey would like.
A stuttering recovery could be badly damaged or even reversed by an interest rate hike even from the present low levels.
We live in perilous times and Bailey, who is not heard that often, is sounding the alarm. Such uncertainties are not the ideal backdrop for Chancellor Rishi Sunak’s budget and multi-year spending review set for next month.
Source: Read Full Article