Three former members of the Bank of England’s Monetary Policy Committee have warned of the increasing risk that the UK economy will fall into recession as a result of the institution’s efforts to contain inflation.
BoE governor Andrew Bailey has recently spoken of being on a “narrow path” towards achieving price stability by raising rates without generating negative growth.
But Adam Posen, president of the Peterson Institute for International Economics and a former MPC member, told the House of Commons Treasury select committee that this goal would be difficult to achieve.
“I will be very happy if there is a narrow path,” said Posen, “but the reality is that there is going to have to be an economic slowdown beyond what is already on the cards in order to get inflation back to target.”
Kristin Forbes, another former MPC member and professor at MIT’s Sloan School of Management, said it was still possible that inflation would return to target without a recession, but only if the central bank moved “more aggressively now”.
“Much of the reason that inflation is so high is because of temporary factors: high energy factors, high traded goods prices, shifts in spending patterns due to Covid. Many of these will fade,” said Forbes. But getting inflation back to 2 per cent will require a better match of supply and demand in the labour market, she added.
Forbes was in favour of the BoE considering “50 basis point” increases to its benchmark rate if the labour market remains tight, arguing that the MPC could revert to a more accommodative stance if necessary.
Posen agreed, stating that the UK’s inflationary outlook warranted a “higher terminal rate” and a “faster move to that point” than is currently expected by markets and current BoE forecasts.
Forbes acknowledged that any easing of the labour market might give the BoE room to move slower on rates, especially if the “large pool of workers” that has recently dropped out of the workforce were to re-enter.
Charles Goodhart, another former MPC member and now emeritus professor at the London School of Economics, thought that the uncertain economic outlook justified the BoE moving cautiously with a series of 25 basis point increases.
“I think that the prospects of a soft landing are not zero, but they’re certainly less than 50-50,” he said. “The likelihood is that we’re at the very least going to have a minor recession and unemployment rising.”
While accepting that “the optimal path for monetary policy is going to keep changing”, Forbes pointed out that the UK faced a greater combination of inflationary pressures than other advanced economies.
All countries are experiencing inflation because of the energy prices shock. But Forbes noted that “medium to long term” inflation expectations in Britain were higher than in the eurozone and US. Paired with the weakness in sterling, this meant that inflation was a “particularly difficult challenge” for the UK.