The shock of inflation in the United Kingdom, which weighs on the purchasing power of the British, will “heavyly weigh” on demand, a factor which must influence the monetary policy of the Bank of England, its governor ruled on Monday. Andrew Bailey.
We face in the United Kingdom the very marked effect on the real incomes of the rise in the prices of our imports, in particular of energy, noted Mr. Bailey at a conference organized by the Central Bank of Austria.
We expect this to weigh heavily on demand and estimate the extent to which our monetary policy tightening should take this into account, he added.
In its forecasts at the beginning of May, the BoE estimated that the British economy would contract in the fourth quarter due to the rise in energy prices.
While inflation jumped to 9% in April over twelve months, a 40-year record well above the 2% target by the BoE, the governor defended the strategy of the monetary institute, which had lowered its rates more historical low at the start of the Covid-19 pandemic and started to rise again at the end of 2021.
I object to the idea that the Bank’s Monetary Policy Committee’s response to Covid-19 has allowed demand to spiral out of control and that this is fueling inflation, he argues, pointing out that GDP was in decline. March only 0.6% above its pre-pandemic level.
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What we have is a very tight labor market, but it’s not a story of rapid demand growth. The number of labor market participants has decreased by 1% since the start of Covid-19, he added.