US economy

BoE's Bailey warns against over-reaction to rising inflation

© Reuters. FILE PHOTO: Bank of England Governor Andrew Bailey poses for a photograph on the first day of his new role at the Central Bank in London, Britain March 16, 2020. Tolga Akmen/Pool via REUTERS/File Photo

LONDON (Reuters) -Bank of England Governor Andrew Bailey said on Thursday it was important not to over-react to a rise in inflation that was likely to prove temporary during Britain’s economic recovery from the COVID-19 crisis.

Echoing the message from the BoE’s June policy meeting last week, Bailey said the reasons why the central bank thought inflation would not prove to be persistent were “well-founded”.

“It is important not to over-react to temporarily strong growth and inflation, to ensure that the recovery is not undermined by a premature tightening in monetary conditions,” Bailey said in an online version of his annual Mansion House speech to leaders of the financial services industry.

He added that the BoE would watch carefully for signs of more persistent inflation pressure.

“And if we see those signs, we are prepared to respond with the tools of monetary policy,” Bailey said.

Last week, the Bank of England kept its economic stimulus programmes in place and, despite the signs of economic recovery, most of its monetary policymakers said they wanted to “lean strongly against downside risks to the outlook”.

In his speech, Bailey said there were at least three reasons why the increase in inflation would probably be temporary.

They included distortions caused by comparing prices now with those of a year ago during the first lockdown; shortages of supplies caused by a rush of pent-up demand and pandemic-linked bottlenecks; and a return to spending on services which would smooth out demand that has been concentrated on goods.

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