In this speech, Ben Broadbent discusses mismatches between spending and supply, caused by the pandemic, in the UK and global economies.
Ben suggests that recent upward pressure on global goods prices is likely to be temporary, but there is some risk of longer-lasting frictions in the domestic economy. Developments in the labour market will be critical in assessing inflationary pressure in the medium term.
- The BoE has become more concerned about the size of its gilt holdings reducing future policy options: there is less to buy and more uncomfortable fiscal-monetary linkages.
- Balance sheet problems can unwind by swapping the BoE’s gilt portfolio for T-Bills with the Debt Management Account. Undesirable linkages would break immediately as monetary and issuance functions are strengthened in their natural institutions.
- Recycling these swapped gilts to the market instead of new gilt issuance would entirely normalise monetary policy space, intra-public sector linkages, and the tradeable free float by 2025-26. The BoE needs to innovate in its ongoing review of this, in our view.
- The latest spike in commodity prices has been supported by an upswing in global growth, as vaccination programmes have rolled out in the developed world and economies have reopened.
- Even quite pronounced cycles in commodity prices should not affect the path of consumer price inflation over the medium term, as long as inflation expectations remain stable.
- We see momentum in the global economy slowing in H2. Combined with a shift in consumption patterns towards services, this should take some of the heat out of commodity demand in H2.