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Britain is not due for a repeat of the 1970s, and Russia’s invasion of Ukraine could even lead to lower inflation than previously expected, a Bank of England (BoE) official said on 4 April.
Senior Journalist, covering the Credit Strategy and FSE News brands.
Several years of high inflation occurred in the 1970s, prior to oil shocks promoting a crisis. But today there is not yet a “psychology of persistently higher inflation,” said Sir John Cunliffe, deputy governor for financial stability at the BoE.
In a speech at the European Economics and Financial Centre, he said the conflict could lead to inflation undershooting the two percent target. He observed that BoE’s decisions on interest rates and quantitative easing would have little effect on the sky-high global energy prices.
To draw inflation down to the two percent target following the shocks, he said the rate setting committee must ensure higher interest rates do not suppress demand long after they are needed.
“The risk on the other side is that we amplify the impact of the squeeze on incomes and, given the lags in monetary policy, that our actions bear down on the economy as the rate of growth in imported prices subsides, taking inflation well below our target at our policy horizon,” he said.
“All else equal, the invasion of Ukraine will have made such an undershoot more pronounced”.
Cunliffe was the only member of BoE’s nine-member Monetary Policy Committee (MPC) to vote to retain interest rates at 0.5 percent in March 2022. He had previously voted to raise rates at the MPC’s December 2021 and February 2022 meetings.
The cost of borrowing remains much lower than prior to the 2008 financial crisis, when interest rates stabilised at around five percent for several years. In 1979, rates soared to 17 percent.
BoE forecasts inflation to reach a four-decade high of 8.7 percent in October 2022.
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