Life will “get difficult” for the most vulnerable people in Britain as inflation rises in the coming months due to the sharp depreciation of sterling in the wake of the Brexit vote, the Bank of England’s Governor Mark Carney has said.
Speaking in Nottingham at a public roundtable event, Mr Carney said that inflation was likely to overshoot the Bank’s official 2 per cent target over the coming years but that the Bank would tolerate this in order to protect jobs.
“We are willing to tolerate a bit of an overshoot to avoid unnecessary unemployment,” he told a group of charities and other third sector organisations.
He added that between 400,000 and 500,000 jobs could have been at risk if the Bank of England had not cut interest rates in August to 0.25 per cent.
The Bank’s most recent inflation forecasts from August predicted consumer price inflation would hit 2 per cent in the third quarter of 2017 and rise to 2.4 per cent in the second half of 2018.
Other economists expect prices to rise even more rapidly.
The current rate of inflation is 0.6 per cent, but factory input prices are up 7.6 per cent year on year, thanks to the sharp increase in import prices due to the plunge in the pound and these are widely expected to translate into higher consumer prices in the coming months.
This week Unilever became embroiled in a dispute with Tesco over the supplier's demands for a sharp price increase for its consumer goods, ranging from Marmite to Hellman’s mayonnaise.
The Bank has signalled that it may cut interest rates again later this year, although a run of better than expected survey results in recent weeks have prompted City traders to temper their expectations of more monetary loosening.
Mr Carney said today it was not the Bank’s responsibility to take decisions based on the uneven social impact of higher prices.
“We care a lot about distribution but we are not a political entity,” he said.
Trade-weighted sterling, to which the Bank pays close attention, this week slumped to a new historic low.
But Mr Carney stressed that the international value of the pound was not the Bank’s target.
“Our job is not to target the exchange rate, our job is to target inflation,” he said.
“That doesn’t mean we’re indifferent to the level of sterling. It does matter, ultimately, for inflation and over the course of two to three years out, so it matters to the conduct of monetary policy.”
The Governor's comments helped send 10-year gilt yields up to 1.137 per cent, the highest since the Brexit vote in June.
They had fallen as low as 0.506 per cent in August.
The UK’s 10 year breakeven rate – measure of market inflation expectations – has risen above 3 per cent, up from 2.44 per cent at the time of the referendum.
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