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Bank of England's hawk battles the doves over inflation threat

Tuesday 1 June 2021

Topical discussion activity for your class

Bank of England's hawk battles the doves over inflation threat

The economy is roaring back to life, but the risk of skyrocketing prices has policymakers debating when to hit the brakes

The first thing many of us did when lockdown lifted was to stumble, blinking, out of our homes and go for a haircut. Advanced reservations meant many hairdressers and barbers were booked out for weeks, with shaggy-haired Brits eager to get a trim.

Once customers made it through the door, they often found a nasty surprise: price hikes.

Women’s hairdressers charged about 6pc more on average than they did a year ago. For gents and children, the shearing bill was up by a tenth. The unhappily hirsute are not the only ones feeling the pinch. From building materials to petrol, costs are rising painfully. These price rises are among the most immediate symptoms of a resurgence in economic output as the UK and global economies roar back from the biggest recession in 300 years.

They also raise serious questions for the Bank of England.

Overall inflation is only at 1.5pc - below the 2pc target. But it appears to be coming up fast as the economy springs back to life. GDP is set to overcome last year’s 10pc collapse, getting back to its old size later this year.

So does the economy still need the emergency low interest rates of 0.1pc? And should officials cut short the £150bn round of quantitative easing, announced last November in the second lockdown?

The Bank is split.

In the hawkish corner is Andy Haldane, the chief economist (pictured top right). The sole member of the Monetary Policy Committee to vote to curtail QE by £50bn in May fears inflation will take off, with dire consequences.

The doves are led by Gertjan Vlieghe, (pictured left) an external member of the MPC, who thinks the main danger is tightening policy too soon, before the recovery is complete. Each set out their case last week, drawing up battle lines over the best way to get out of crisis mode.

First up was Haldane. He is an optimist, as he made clear repeatedly last year and into 2021, predicting a “V-shaped” recovery, lashing “chicken licken” gloom-mongers and calling the economy “a coiled spring” of pent-up demand.

The remainder of the article can be accessed at: https://Hawks v doves inflation battle

To what extent does the above text highlight the difficulties for a central bank of conflicting economic objectives?

Monetary policy  

Unemployment v inflation trade off (HL only) 

The economics of the Covid-19 virus 

Which way should the Bank of England (and other central banks around the world) move - is the control of inflation more important than economic growth and unemployment?

Tags: macroeconomics, inflation


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