Inflation? Don’t blame us, says bank chief

LONDON — Bank of England Governor Andrew Bailey hit back at critics of the central bank’s record on Wednesday, insisting that it shouldn’t be blamed for rampant inflation.

“Even if we had had the benefit of full hindsight in the run-up to the war in Ukraine, and ample advanced warning,” Bailey said in a keynote speech to the British Chambers of Commerce, “then in order to keep inflation at around 2 percent, we would have had to raise Bank Rate well into double digits, sending unemployment much higher than it is today, and we would have had to do so in the middle of the worst pandemic in more than a century.”

Bailey is due in parliament on Thursday to face questions from the Treasury Select Committee on the impact of the Bank’s ‘quantitative easing’ policies over the last decade, which some economists argue has played a large role in preparing the ground for last year’s surge in prices.

The Bank has already tried to push back against that narrative, with an exhaustive analysis from monetary policy committee member Ben Broadbent showing that broad money aggregates — which have often, but not always, acted as a useful advance indicator of inflationary pressures — gave no advance warning for the events of the last 18 months, when inflation surged to a 40-year high of nearly 11 percent.

The Bank of England expanded its balance sheet by over £340 billion in the 12 months from March 2020, absorbing the vast majority of the debt issued by the U.K. government in its efforts to stabilize the economy in the first year of the pandemic.

The Bank’s critics argue that its accommodation of that borrowing effectively suspended market discipline during that period, facilitating huge amounts of waste and fraud.

The House of Commons’ Public Accounts Committee estimated last year that nearly 9 percent of the money disbursed through the government’s furlough scheme — some £5.3 billion — was lost to “fraud and error”, while another £21 billion in pandemic-related government loans was likely to be written off. The Committee said another £10 billion was wasted in the procurement of inadequate protective personal equipment for the National Health Service and other agencies.

In his speech, Bailey again stressed the supply-side nature of the shocks that have driven inflation: the pandemic, Russia’s invasion of Ukraine and the ensuing sharp rise in energy and food costs. These have caused permanent income losses to Britain, he argued, saying that the Bank’s task is now to prevent inflation becoming entrenched. While he steered clear of the words of BoE Chief Economist Huw Pill last month, who warned that Britons need to accept that they have become poorer, his message was nonetheless essentially the same.

“Monetary policy can’t make the impact on real incomes go away I’m afraid,” Bailey told his audience.