“Monetary policy will not produce more HGV drivers”

The Governor of the Bank of England, Andrew Bailey, has gone on record to say the pandemic recovery rate has slowed down and is getting even slower. The reasons for the sluggish economic recovery is said to be due to labour shortage and supply bottlenecks. He has also warned that no monetary policy will produce more HGV drivers.

Bailey attended the annual dinner of the Society of Professional Economists and addressed attendees on how the pandemic has highlighted the fragility of our economy, jokingly adding “when are the locusts due to arrive?”.  More is going wrong in the wake of the pandemic than expected, and the gods do seem against us at this moment.

Labour shortages and supply issues

The Bank of England chief referred to his predictions around one year ago when he stated that the hard yards would come, continuing to suggest that these predictions now seemed accurate and we’re experiencing the hard yards today.

He highlights that increased demand for services over goods has not occurred at the scale expected on the back of the COVID pandemic. Joined by labour shortages and supply bottlenecks, this has created a recipe for lower output and a slow economy struggling to pull itself together.  

Underestimated rising inflation

Switching his attention to the rate of inflation, Bailey referred to the Bank of England’s initial forecasts that inflation would rise to 4% by December. He believes that the series of events we have witnessed since these forecasts were produced will mean it is more likely that inflation will surpass 4%.

This may be a cause for concern, but Bailey states that this is a temporary issue and will correct itself over time. Even though the pressure of rising inflation is real, here and now, he expects it to return to within the Bank of England’s target in 2022.

The Monetary Policy response

Bailey believes that any monetary policy response to inflation should focus on Bank Rate and not Quantitative Easing (QE), stressing that any policy response is not going to take care of supply problems of semi-conductor chips and it is not going to magic up more HGV drivers on the road to our fuel stations. In fact, he believes doing so has the potential to worsen the situation by applying increased downward pressure on the slowing economic recovery.

However, Bailey said there is agreement between the nine members of the MPC that the stimulus to the policy in response to the pandemic needs to unwind eventually. Any unwinding should include a Bank Rate increase, which may not have to be put on hold until the end date of the asset purchase programme.

He finalised his speech by stating some tightening of policy is needed to meet inflation targets sustainable over the coming months – and more evidence is proving this is the right course of action. Yet, the situation is being monitored meticulously.

October 2021