Bailey's forecasting failures exacerbated inflation, Bank of England politician admits

Andrew Bailey has been widely criticized for letting inflation get out of control. Credit: TOLGA AKMEN/EPA-EFE/Shutterstock

The Bank England's poor economic outlook has undermined its response to the cost-of-living crisis, adding to the pain and undermining the credibility of the institution, a senior political figure warned.

Swati Dhingra, an economist who said last year that “a lot of pain and criticism and inaccuracies in monetary policy could have been avoided if we had better data, statistics and analytical tools so that we could better conduct some of these types of analysis.»

Central banks have «not kept pace» with major changes in the economy since the 1970s, when the world was last hit by a devastating energy price crisis, she said in a speech to the UK Network of Women in the Economy. event.

Dr. Dhingra acknowledged that the Bank's modeling has «withstood mass criticism» and said the institution is facing a «historic moment» to get its analytical capabilities «in shape for the next big shock that will come along and also be able to mitigate all

The bank acknowledged that it repeatedly underestimated inflation when prices began to rise in 2021 and 2022, and underestimated the stubborn growth in spending in recent months as households suffered from a protracted cost-of-living crisis.

1606 Bank of England inflation

Andrew Bailey, the governor, admitted this month that «we were wrong» about the post-pandemic labor market tightness and subsequent impact on inflation, while the Bank struggled to accurately predict the price. has been rising since then.

Mr Bailey said: «We still think the inflation rate will come down, but it will take much longer than we expected.»

Dr. Dhingra, who wanted to keep interest rates at 4.5% this month but a majority of the nine-member MPC voted to move to 5%, said inflation should now finally come down quickly due to behind price pressures in supply chains. are disappearing and energy prices are falling.

“We can take some comfort as there is promising evidence that the decline in producer price inflation (PPI) has been widespread across the consumer basket. ”, she said.

2306 ppi and cpi

There are several areas where the lower PPI reported by businesses is not making it to store shelves, including fruit, tobacco and beer.

However, at the same time, Dr. Dingra said lowering the cost of energy is seeping through the economy, while labor-intensive industries, including retail and hospitality, are “seeing some flattening of wage inflation,” which is important for keeping consumer prices down.

Dr. Dingra said it was nonetheless important to raise interest rates from December 2021 to show that the Bank is serious about inflation.

Interest rate 2,306 boe

She said: Nearly abnormal interest rates in 0.1%, which we used to be used to.

“This is really done to hedge against any runaway domestic inflation, but the biggest problem is that it can’t do anything with spot inflation, it will only have a delayed effect.»

This means that «its effects will not be felt until the end of this year, but there are promising signals that CPI inflation should fall.»

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However, analysts at Capital Economics said that this would require higher interest rates, predicting that this would trigger a recession in the UK.

Economists said: “Wage growth and core CPI inflation will fall to levels meeting the 2 percent target only if the Bank triggers a recession by raising rates from 5 percent now to at least 5.25 percent and keeping them at their peak until the end of 2024.”