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4 Minute Read by (Reuters) – LONDON (Reuters) – On Thursday, Bank of England Governor Andrew Bailey said it was crucial not to overreact to a rise in inflation that would likely be brief during the UK’s recovery from the COVID-19 issue. On the first day of his new duty as Governor of the Bank of England, Andrew Bailey poses for a portrait in London, Britain, on March 16, 2020. REUTERS/File Photo: Tolga Akmen/Pool Bailey echoed the BoE’s statement from last week’s June policy meeting, saying the reasons the central bank believed inflation would not be persistent were “well-founded.” “It’s critical not to overreact to temporarily strong growth and inflation, so that the recovery isn’t jeopardized by a premature tightening of monetary conditions,” he said in an annual speech to financial services industry leaders at Mansion House. Bailey went on to say that the Bank of England would be on the lookout for signals of increased inflation pressure. “And if we see those indicators, we’re ready to respond with monetary policy tools,” he added. Following Bailey’s warning against overreacting to rising inflation, the pound sank. In May, British consumer price inflation surged to 2.1 percent, exceeding the Bank of England’s 2 percent target threshold earlier than expected. Last week, the Bank of England predicted that inflation would rise beyond 3% once the UK’s shuttered economy reopened, but that the rise would only be “temporary,” and that most policymakers preferred to retain stimulus at full speed. Only Chief Economist Andy Haldane voted to reduce the Bank of England’s 895 billion pound ($1.2 trillion) bond-buying program at his last policy meeting before leaving. Last month, he warned that the Bank of England was facing its “most perilous time for monetary policy” since the 1992 European Exchange Rate Mechanism fiasco. The US Federal Reserve began decreasing its monetary stimulus a week sooner, announcing its first rate hike in 2023, a year earlier than previously expected. Bailey stated in his address that there are at least three reasons why the spike in inflation would most likely be temporary. They included price distortions generated by comparing current prices to those from the first lockdown a year ago; supply shortages induced by pent-up demand and pandemic-related delays; and a return to spending on services to smooth out demand that has been concentrated on commodities. The Bank of England is concerned about a probable rise in unemployment as well as inflation. From Thursday, the government began requiring firms to contribute to the cost of keeping furloughed staff on the job, with the program set to end at the end of September. In his speech on Thursday, Bailey stated that a rise in average earnings was attributable in large part to employment losses in low-paying sectors like hospitality, which had been struck the hardest by the pandemic. “We should not put most of our attention on the labor market,” he remarked. “Our focus should be on whether and how quickly people return to work, as well as to what extent they do so.” The Bank of England must also consider the dangers posed by a new surge of COVID-19 cases, which has caused the government to postpone the relaxing of the previous social-discrimination restrictions until July 19. ($1 = 0.7261 pounds) Andy Bruce contributed to this report. William Schomberg and Pravin Char edited the piece./nRead More

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