Haldane flags potential dangers of inflation ‘tiger’

BANK of England chief economist Andy Haldane yesterday flagged a risk the inflation “tiger” proves “more difficult to tame”, requiring monetary policymakers to act “more assertively” than markets expect.

He said: “[Economist] Friedrich von Hayek once referred to inflation control as akin to trying to catch a tiger by its tail. That metaphor seems apt today. For many years, the inflationary tiger slept. The combined effects of unprecedentedly large shocks, and unprecedentedly high degrees of policy support, have stirred it from its slumber... the tiger-taming act facing central banks is a difficult and dangerous one.”

Central banks unleashed huge monetary stimulus amid the plunge in output triggered by the Covid-19 pandemic. UK base rates have been cut to a record low of 0.1%. The Bank of England has ramped up quantitative easing. It has now accumulated £895 billion of UK government and corporate bonds under the QE programme started in response to the global financial crisis. Mr Haldane noted – in spite of “large shocks” such as the global financial crisis, Brexit and Covid – inflation had “remained stable at levels considered to be around optimal”.

He said: “Inflation is the tiger whose tail central banks control ... It is possible that, as vaccinations are rolled out and some degree of normality returns, inflation will return to a stable state of rest. Indeed, if risks from the virus or elsewhere prove more persistent than expected, disinflationary forces could return. But, for me, there is a tangible risk inflation proves more difficult to tame, requiring monetary policymakers to act more assertively than is currently priced into financial markets.

“People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely. But, for me, the greater risk at present is of central bank complacency allowing the inflationary big cat out of the bag.”