Bank chief: It looks like the gods are against us
He warns over string of economic shocks and jokes: When’s the plague of locusts?
BRITAIN faces ‘hard yards’ ahead as the economy’s recovery from the pandemic stalls, the Governor of the Bank of england warned last night.
In a downbeat speech Andrew Bailey cautioned that interest rates will have to rise to tame escalating prices – but stressed the economy is currently too weak to withstand such a move.
He said so many problems have reared their heads over the last few months that he was tempted to ask, ‘And when are the locusts due to arrive?’ in a reference to the Biblical plagues of egypt.
Mr Bailey argued Covid might have amplified the impact of other shocks, adding jokingly: ‘either that or the gods really are against us.’ Inflation, or a rise in the cost of living, has been running away from the Bank’s target of 2 per cent recently as staffing shortages, supply chain blockages and red-hot energy prices have combined with soaring demand since lockdown ended. The Bank conceded last week that inflation could rise above 4 per cent by the end of the year, potentially adding hundreds of pounds on to household bills and shopping baskets.
Economists had been relying on a strong economic recovery, lifting wages and getting unemployed workers back into jobs, to help balance rising prices.
But at the annual dinner of the Society of Professional economists, Mr Bailey said: ‘The recovery has slowed and the economy has been buffeted by additional shocks.’ He said the switch from spending on goods, when people were locked down, to going out and splashing cash on restaurants and other experiences ‘has not taken place to date on the scale expected’. He added: ‘Meanwhile, supply bottlenecks and labour shortages have weighed on output, and are continuing. Indeed the number of high profile supply bottlenecks appears to be increasing. I must say that when I heard that we were suffering a shortage of wind to generate power I was tempted to ask, “And when are the locusts due to arrive?”’
A slew of recent issues have added to inflation and damaged output. A shortage of staff – due to some on furlough, or being inadequately trained for indemand roles such as lorry drivers – has meant some firms are having to spend much more on recruitment. And a jump in demand for a range of materials, from high-tech semiconductor chips to steel as manufacturing activity has resumed, has pushed up prices.
Supply shortages and shipping chaos has also caused energy and fuel prices to soar. Mr Bailey said: ‘A number of these supply bottlenecks are not obviously a product of Covid, though others are. It is also possible that the economic fragility created by Covid has amplified the impact of other shocks – either that or the gods really are against us. I think it is more likely Covid amplifying at work.’ He confirmed that over the ‘medium-term’, interest rates will have to rise to tame inflation.
The Bank cut its base rate to 0.1 per cent last year. while reversing this could help to control rising prices, economists are worried it may put the brakes on recovery.
The Governor said many factors adding to higher prices would be ‘transitory’. But in a gloomy warning, he said: ‘The recovery is weakening. A lot therefore turns on how effectively supply capacity is rebuilt and over what time, and how the labour market evolves. These are truly hard yards.’
‘These are truly hard yards’