Bank of England governor not expecting soaring inflation despite pent-up demand
The governor of the Bank of England has said he is more positive about the future of the economy but added the optimism comes “with a large dose of caution”.
Andrew Bailey told BBC Radio 4’s Today programme that risks and uncertainty remain, including how much of the accumulated £180 billion unintentionally saved by high and middle-income households will be spent once restrictions ease.
Some economists have warned that the pent-up demand could lead to high inflation, but Mr Bailey said the central bank does not expect inflation to hit suggested heights of between 4% and 5%.
Instead, he believes it will return to around 2% in the next few months.
I think there will be for many people more of a hybrid model of working at home and working in a place of work... I would be very surprised if we went back to exactly as we were before Covid
Mr Bailey also said he does not believe office workers will ever return to the pre-Covid five-days-a-week commute, with most employees working in a hybrid model.
The governor said: “I think we will see things change, because I think some habits and some practices will prove to be sustainable.
“I think there will be for many people more of a hybrid model of working at home and working in a place of work… I would be very surprised if we went back to exactly as we were before Covid.”
On the economy, he said: “We now have a more balanced picture of risks… The risks on the upside are that there has been a very large build-up in savings in the economy, largely because people have not been able to do the things they normally do.
“The question of course then is: to what use will those savings be put and over what period of time? It could introduce more consumption and more demand into the economy.”
He pointed out that around 5% of savings could be spent over the next two years but “it could be larger”.
It has affected the low paid more, because the sectors of the economy that have had a larger shutdown tend to have a greater concentration of low-paid workers
Mr Bailey said the effects of Covid have been very unequal, hitting the poorest hardest – with unemployment still expected to rise.
He said: “It has affected the low paid more, because the sectors of the economy that have had a larger shutdown tend to have a greater concentration of low-paid workers.
“I would also add that there are more women in that section of the labour force. I think there is a greater ethnic proportion in that labour force (too).”
Any new Covid variants that require further restrictions and lockdowns would also knock the economy, he added.
But the governor said the Bank of England was ready to use more “firepower” if required, including the introduction of negative interest rates to encourage spending.