BoE urged to tackle inflation carefully to avoid job losses

The Bank of England (BoE) intends to address the country’s inflation level after it spiked too high, aiming to reduce the rate. This, however, needs to be done carefully, without causing severe economic stagnation that could result in job losses, officials said.  

This inflation concern was raised after Sarah Breeden, the Deputy Governor of the Bank of England for Financial Stability, gave a speech in Cardiff on Tuesday, September 30. In her speech, Breeden pointed out that inflation was expected to reach 4% in September, amid food and energy price hikes, as well as increases in payroll taxes and controlled prices. “It is too high,” she added. 

At that time, Catherine Mann, an American economist and a member of the BoE’s Monetary Policy Committee (MPC), also commented on the situation during a Financial Times event in London. Mann noted that individuals have changed their expectations for future inflation from the earlier official target of 2%. 

Following this situation, she urged policymakers to commit more to restoring price stability and rebuilding trust.

The UK’s ongoing high inflation raises tension among individuals 

The above remarks highlight mounting concerns among the MPC that the UK is beginning to stand out from other developed countries because of the ongoing high inflation.

To address these concerns, economic analysts suggested that the situation may be partly a result of government policies, adding that it could also be due to long-term changes in how families and businesses operate.

When the MPC announced its intention to cut interest rates in August, several officials raised concerns about it. This led to two rounds of voting before a conclusion was drawn. In September, things took a different turn. They voted 7-2 to continue with the current borrowing costs at 4% and market analysts do not expect any changes before the end of the year.

Concerning the changes made, the Deputy Governor of BoE expressed that she still believed they could handle any small challenges that might come up in the short term, referring to them as “a bump in the road.”

In the meantime, she speculated that inflation would return to the BoE’s earlier target of 2% as the job market slows down and the pressure on wages decreases.

Breeden had also raised concerns about the inflation level earlier in August. This followed data released that month indicating that the inflation level had risen to 3.8%. Regarding this data, she suggested possible risks on both sides.

Analysts still point out that inflation could become “sticky, not bumpy” if businesses continue to raise prices or if the BoE and other policymakers miscalculate the amount of labor available in the market.

Breeden calls for the urgency to lower interest rates

Breeden cautioned that if the BoE delayed lowering interest rates again, products and jobs would be harmed significantly. This might result in inflation levels falling below the target level.

On the other hand, Mann mentioned that there are clear risks that a long period of persistently high inflation has altered consumers’ behavior. She explained that once inflation in the UK gets above 3%, it does not matter what goods they buy — consumers start paying much more attention to all the prices they see.

“We have been above that level for quite some time already,” she added. 

However, Mann noted that this does not necessarily mean she is ruling out additional interest rate cuts. Based on her argument, consumers are concerned about higher prices. They are also increasingly nervous about job prospects, citing high uncertainty surrounding GDP growth.

She further explained that if the economy improves, consumers will start to spend a little and buy things. However, if the economy slackens, they will “keep their wallets shut,” making it difficult for companies to raise prices, as consumers cannot or will not buy their products, she said.

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