Disinflation is still on track, BoE governor insists

Bank of England governor Andrew Bailey on March 5 told members of the UK parliament’s treasury select committee that disinflation was still on track. 

Defending his decision to vote for the 25 basis point cut that took the bank rate to 4.5% on February 5, Bailey said the “underlying disinflation story” still held.

He added that the erosion of the persistence of inflation, resulting from shocks such as the pandemic and Russia’s invasion of Ukraine, was continuing.

The BoE’s chief economist, Huw Pill, told the committee that even though progress was being made towards reaching the bank’s 2% target, this did not mean the mission to tame inflation had been accomplished.

“Shocks from the pandemic have not totally disappeared,” he said, pointing to wage growth in the UK economy.

The bank projected on February 5 that inflation would peak at 3.7% in the third quarter of this year, and that this would be driven by rising energy prices.

Alan Taylor, another MPC member, told the committee that the rise in near-term inflation was due to persistently high energy prices and the increase in administered prices, including value-added tax (sales tax).

Pill said that continued weakness in productivity growth or wider supply-side disruptions would be likely to sustain underlying inflationary pressure. This, he said, could require “a slow removal of monetary policy restriction”.

Bailey said that although the UK’s population had grown by more than forecast last year, output had remained largely the same as during the previous year. “This leaves you wondering what is really going on,” he said, adding that productivity might be an issue in the economy.

When asked about the impact on UK inflation of US president Donald Trump’s tariffs, BoE officials said it remained unclear, though the measures posed substantial risks to the economy.

Megan Greene, an external member of the bank’s monetary policy committee, said a diversion to the UK of exports originally intended for the US, but with additional discounts, could place downward pressure on inflation. However, she added that barriers to UK exports in the US could have an inflationary effect, though the impact of tariffs on the UK’s GDP was as yet unclear.