It is possible that the response to the COVID crisis ultimately delivers supply side benefit to the UK economy, said Bank of England (BoE) chief economist Andy Haldane, as he warned of the need to act quickly to “nip inflation in the bud”.
Speaking at the Institute for Government, Haldane said the damaging effects of the pandemic to the economy “have been mitigated very materially, not least because of policy action that we took at scale and speed”.
“As of now you could easily tell a much more positive story about the supply side of the economy,” he said. This is partly because employees are more productive without having to commute – which he said was one of the “least productive forms of human activity” – and partly because businesses have “tooled themselves up” in the digital era.
Haldane, who will be leaving the bank in September, also warned of rising inflation. He said that if left unchecked it wouldn't surprise him if it went "well north" of the government's target of 2% by December.
He said the UK must act to stop rising inflation very early on, to avoid having to raise interest rates, which could come as a shock to mortgage holders and corporate borrowers – “the last thing we need right now”.
According to Haldane, history has shown that inflation can often start as localised price pressures, which end up becoming more generalised, and temporary price hikes, which end pup being persistent.
He said this is a “cumulative, evolutionary process we've seen time and time again” and policy-wise the process needs to be nipped in the bud.
The Bank expects UK CPI inflation to rise to 3% in the coming months, but insists it will then drop down towards its 2% target as stimulus is kept in place.
Haldane also said that the global financial crisis of 2008 helped the economy “flex its policy muscles”, without which the government's response to COVID would not have been "as rapid or as large”.
"We should feel safe relatively to where we were 10 or 12 years ago. The system in the UK and globally is on steadier legs and a robust foundation."
Last week the BoE voted unanimously to leave interest rates at record lows of 0.1% despite concerns of rising inflation.
In a move that was widely expected, it also maintained the target stock of quantitative easing (QE) at £895bn ($1.2tn) as the Monetary Policy Committee remains cautiously optimistic about the UK economic recovery.
Haldane was the only member to vote for curtailing this round of QE early, holding at £100bn instead of completing the bond purchases set out in November.