Inflation, Growth, and Trust: Can the Bank of England Meet the Moment?

Key Question Being Explored in This Insight:

How can the Bank of England balance inflation control with the pressures of a weakening job market and slow economic growth? With rising inflationary pressures and uncertainty over economic recovery, can the Bank navigate these conflicting challenges?

View the page of: Deanne Julius

View the page of: Jonathan Haskel

Institution: Imperial College London

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This video discusses how the Bank of England is dealing with challenges such as inflation, slowing economic growth, and job cuts. Experts debate on the balance between controlling inflation and supporting economic growth, navigating uncertainties in the labor market, and considering global factors like energy prices and geopolitical tensions. The discussion also touches on the importance of a central bank's focus on its mandate, the potential risks of a dual mandate, and the role of fiscal policy in promoting growth while maintaining inflation control.

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1. **Bank of England's Policy Dilemma**: The video highlights how the Bank of England is grappling with rising inflation, slowing economic growth, and increased job cuts. It poses the question of whether the bank can achieve its inflation target without stifling economic recovery.

2. **Inflation Target and Economic Growth**: There is a focus on how the Bank of England navigates the tension between short-term relief and the long-term risk of inflation expectations becoming de-anchored. The discussion revolves around how the bank balances supporting economic growth while also controlling inflation.

3. **Labor Market Challenges**: The video explores the challenges in the UK's labor market, where job cuts are rising sharply, particularly in the services sector. This is placed against a backdrop of a sluggish economy and persistent inflation.

4. **Policy Measures**: The experts discuss what policy measures the Bank of England can take in response to the weakening economy and rising inflation. The discussion considers whether there should be a stronger focus on job growth or if the priority should remain on inflation control.

5. **External Factors and Global Pressures**: The video delves into how the Bank of England should respond to external factors such as global supply chain disruptions, energy prices, and geopolitical tensions. The impact of these factors on inflation and economic conditions is considered, emphasizing the need for scenario analysis and preparedness.

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Here are some key quotes from the video you :

1. **Jonathan Haskell on the Bank of England's policy dilemma:** "You're quite right to highlight in your introduction that the Bank of England faces a particularly tricky source of navigation here... If that momentum is removed, then all those things will do the work that the Bank of England needs to do, sort of for it."

2. **Dame Deanne Julius on policy measures:** "The priority certainly is inflation... I think the remit for the Bank of England is pretty clear, even though, as you say, it's a tricky time because the economy is certainly slowing, while inflation seems to be a bit stuck."

3. **Jonathan Haskell on the labor market and monetary policy:** "It would be incurring additional risks, some of them might be... the unanchoring, the de-anchoring, whatever the right word is, of the inflation expectations."

4. **Jonathan Haskell on external factors affecting inflation:** "There is a very fast transmission from energy prices into inflation... So it's not clear which way they are gonna go."

5. **Dame Deanne Julius on the Bank's prioritization of a dual mandate:** "I am actually a firm believer in a single mandate... I do think that it's important that a central bank focuses not solely, not blindly on crisis controls, but that’s its main, its main task."

These quotes highlight discussions on the Bank of England's challenges with inflation, monetary policy, labor market dynamics, and external factors impacting the economy.

X-TIMESTAMP-MAP=LOCAL:00:00:00.000,MPEGTS:90000

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This week we explore how the Bank of England is grappling

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with inflation, slowing economic growth

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and a labor market that's facing increased job cuts.

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Amid all these challenges,

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can the bank achieve its inflation target

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without stifling recovery?

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Joining me today are two experts in the field

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of monetary policy and economic strategy.

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Jonathan Haskell, professor

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of Economics at Imperial College London,

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and a former member of the Bank

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of England's Monetary Policy Committee. Welcome, Jonathan.

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Thank you very much for having me on. Julia

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Dame Deanne Julius Distinguished fellow at Chatham House,

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and a founding member of the Bank

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of England's Monetary Policy Committee.

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Welcome Dame Deanne. Thank you. Nice to be here.

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It's a pleasure to have you both here.

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Let's start with you, Jonathan.

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The Bank of England faces a difficult policy dilemma

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with rising inflationary pressures amid a weak job market.

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Recent reports show businesses are cutting jobs at their

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fastest rate in years, and inflation has edged up

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again with the bank's.

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Next rate decision looming.

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Market expectations are high for a cut,

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but inflation remains above target.

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How does the Bank of England navigate the tension

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between controlling inflation

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and supporting economic growth?

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Thank you, Julia. You're, you're quite right

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to highlight in your introduction that the Bank

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of England faces a particularly

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tricky source of navigation here.

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Um, and the crucial question is the extent to which

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the adverse headwinds that there are, there are, especially

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around the labor market and around the amount of activity,

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will pull down inflation naturally,

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because, as you say, there's quite a lot

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of momentum in the current inflation.

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Uh, and if that momentum is removed by the fact

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that the labor market is getting, a little looser,

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consumers are getting, a little bit more pessimistic, if

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that momentum is removed, then all,

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all those things will do the work, that the Bank

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of England needs to do sort of for it.

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If you sort of, if you sort of would see what I mean.

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And that would give you a,

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a cut in interest rates probably tomorrow,

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and then maybe not too much, more

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that needs needs to be done.

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Uh, on the other hand, if those,

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headwinds actually don't pull down the inflation rate,

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then the Bank of England has got much more of a problem.

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Uh, it has a remit, as you know, for a 2% inflation rate,

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and it would be unwilling, I think,

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to tolerate a long period of time of inflation

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above its 2% level.

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So it's all to play for,

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and as I say, I think it crucially depends upon

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how strong those headwinds are.

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Given that inflation remains above target,

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how will the bank balance short-term relief

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with the long-term risk

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of inflation expectations becoming de anchored should the

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bank consider other measures beyond interest rate cuts?

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The bank's always been very, very clear,

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at least the time when I was on the MPC,

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and Dan can speak for her time,

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the bank's always been very clear

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that the inflation target is the inflation target,

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and that's the bank's central job to hit that target.

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Uh, now the, I don't think there's much evidence

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that inflation expectations are getting out of control.

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Of course, two years ago when inflation was

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11%, that was quite a worry.

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But inflation is close to target at the moment.

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So I think inflation expectations getting out

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of control are not really uppermost in the bank's mind.

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What's much more in their mind, I think, is

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how gradual they'll want to be in their path

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of interest rates, cuts to get them back to the target,

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which is what they wanna hit.

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The UK's labor market is showing signs of strain

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with job cuts rising sharply,

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particularly in services sectors.

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This is happening against a backdrop

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of a sluggish economy and stubborn inflation.

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Dame Deanne, with a stagnating economy

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and inflation still on the rise,

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what policy measures can the Bank of England take

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to manage this stagflationary environment?

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Should there be a stronger focus on job growth,

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or is the priority still inflation control?

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Well, Julia, the priority certainly is

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inflation, as Jonathan said.

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That is the mandate that the government has given the Bank

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of England, to hit that inflation target at 2%,

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the government sets that target.

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Uh, so I think the, the remit for the Bank of England is,

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is pretty clear, even though, as you say, it's a tricky time

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because the economy is certainly slowing,

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while inflation seems to be a bit stuck actually, at

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above 2% rate.

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Now, of course, the Bank of England doesn't just say, if,

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if it's above 2%, we, we then raise,

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or we certainly don't cut.

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It looks at the reasons why it thinks

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inflation is what it is.

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And one way to do this is

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to think about the different parts of the economy.

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If you look at the household sector, for example,

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they're actually receiving wage growth

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that's higher than inflation.

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So real wages are going up in, in real terms,

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and in fact, maybe going up a little bit too much, in

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that, they, they seem to be going up around around 6%.

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Uh, but that will support consumption

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in the household sector.

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It's the business sector that is really, very low,

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very weak, has very weak confidence since the budget.

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It's being hit with quite substantial cost increases.

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That of course, cuts into profits.

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And if you don't have profits, you don't have investment.

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Uh, so the business sector is the weak part of the economy.

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And the third sector is the public sector,

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which has been promised quite a big increase in spending

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for the NHS for social programs.

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Uh, there's pressure to increase for spending on defense.

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Um, so the government sector, the public sector, is,

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is pretty strong in terms of its, its,

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growth at the moment.

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And, and that means that the big picture, really is

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that inflationary pressures are still fairly fundamentally

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there, particularly in the government sector,

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fiscal spending, but also in the household sector

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with wages being what they are.

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So the bank will be looking at, at all of these factors

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as it does and try to make a, a balanced decision,

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whether it, whether the economy is slowing down enough

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that they can afford to cut, which as you say,

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the markets expect, or whether indeed they ought to stick

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where they are for the time being.

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As the job market weakens.

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Do you think the bank will be under pressure

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to ease monetary policy sooner?

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Well, I think I would take a little bit of exception with,

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with your statement that the,

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labor market is weakening substantially.

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It, it may, but at the moment, unemployment,

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our unemployment rate's about 4.4%.

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Uh, that's probably pretty close to full employment,

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especially given how high the inactivity rate is.

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The people who, are in the age range

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of the labor market, but are not looking for a job.

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So I wouldn't say that at the moment there's a huge problem.

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There's, not evidence

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of a particular problem right now with unemployment.

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Uh, I guess the, the issue is that,

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if the bank did pay more attention to the unemployment rate,

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it would be, and, and

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therefore cut rates, more dramatically,

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it would be incurring additional risks.

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Some of them might be, as you mentioned

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before, the, the un anchoring, the de anchoring,

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whatever the right word is,

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of the inflation expectations.

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But I think more likely it is just that there's

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so many uncertainties out there in the international market,

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uncertainties about what happens

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to oil given Middle East developments uncertainties about,

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the,

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the problems from the Ukraine war uncertainties about the

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new US president and what he may do with tariffs.

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Um, so this is a time to be a bit cautious in, in my view,

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rather than to be too aggressive.

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And I think that probably will weigh somewhat on the minds

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of the MPC members.

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And I'd add, unfortunately, there's an additional source

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of uncertainty, which is around exactly

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what the labor market is doing.

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As, as Dan said,

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quite whether the labor market is deteriorating

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or not is rather difficult to say,

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because unfortunately, as, as people will know,

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the labor force survey upon which, in Britain, we rely,

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to get a good picture of the labor market,

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has suffered from very low response rates recently.

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Uh, and it's become increasingly difficult for the Office

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of National Statistics to give a picture to, well,

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citizens in general, but the monetary policy committee,

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in particular,

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and I'm afraid that's another source of uncertainty,

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and I think that might be another reason,

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as Diane was just saying, for being a bit cautious,

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and maybe going a bit more slowly,

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than the bank might otherwise do.

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As the UK faces challenges both domestically

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and internationally, how should the Bank of England respond

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to external factors such as global supply chain disruptions,

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energy prices, and geopolitical tensions?

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These issues seem to be playing a significant role in

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inflation, even as domestic economic conditions remain weak.

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Jonathan, how much weight should the bank place on global

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factors such as energy prices and geopolitical instability?

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Thanks, Julia. Let, let me say a word, if I may,

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about energy prices,

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and perhaps I'll pass to Diane, who's the expert on,

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the, the, the, the, the more kind of global policy types

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of issues on energy prices.

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The way the banks' models work is there is a very fast

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transmission from energy prices into inflation,

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and that lasts quite a long time, actually.

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So I suspect then that the changes in energy prices,

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if they're very marked

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and look like they're gonna last for, for a while, will have

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to be offset by appropriate interest rate changes.

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Now, figuring out those changes

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of energy prices is quite difficult, of course,

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because, on the one hand, you know,

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there may be geopolitical events which raise the

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price of oil and all of that.

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On the other hand, if world demand slows down,

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then typically energy prices

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and commodity prices in general go down as well.

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So it's not clear which way they are gonna go.

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Um, I think that's the narrow thing on energy prices.

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And then as far as the sort

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of broader geopolitical issues are concerned, I think

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that's a very difficult balance between whether we think

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that those would be inflationary, you know,

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because of tariffs and increases in import prices,

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or whether they think they would be overall deflationary,

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because of, you know, a trade war

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and the result of resultant effects on kind of world demand.

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So, I I, I, I, I bow to Dan,

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who's I'm sure much more expert on these things than I am.

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Well, I think, the, the difficulty is that

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although, perhaps I spend more time reading

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and listening to, podcasts

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and so forth about some

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of these geopolitical things in connection

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with Chatham House, whether that makes me any wiser

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or any better predictor, I, I really doubt, I,

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I think though that it is the case

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that this may be something

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that the bank should consider doing some scenario work on.

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Uh, in, in the last few inflation reports, as, as we know,

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they have, talked about three different scenarios

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and said, which one is their base case?

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I'm not sure they use the term,

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but the case on which the model, is, is calibrated.

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Uh, this may be a situation where there needs to be,

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a rather extreme scenario, test case, if,

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Trump does indeed succeed in provoking a global,

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trade war and what that means for,

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for different economies.

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And indeed, if I could just add to that

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in a recent speech, Alan Taylor,

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who's the most recent member

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of the Monetary Policy Committee, a terrific economist,

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a really, really good addition.

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He had a fourth scenario,

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which was the three scenarios that Diane me mentioned,

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plus a fourth, much more adverse scenario in terms

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of demand showing a much bigger slowdown,

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and a bigger slowdown in, inflation

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and a severe undershoot of the inflation, target.

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So there may be some reason for pulling in

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Alan Taylor's fourth scenario, to your point, Dan,

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in some of the bank's thinking.

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So some of that groundwork actually at least has been laid

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In light of these ongoing global pressures.

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Do you think the bank should still prioritize a dual mandate

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in that it addresses both inflation

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and growth, similar to the Federal Reserve's approach,

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or continue focusing primarily on inflation?

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Well, I think the, the Federal Reserve,

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sometimes they're helped by having a dual mandate,

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because whatever they decide to do,

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they can say they're focusing on one end

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of the mandate or the other end.

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Uh, on the other hand, it seems to me as a,

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as a formal central, former central banker,

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I am actually a firm believer in a single mandate.

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Uh, now of course, our single mandate,

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about controlling inflation, about price control also has,

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supporting the government's policies, as a,

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as a secondary,

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but relevant decision, the trouble

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with a dual bandaid is that the,

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the Central Bank really only has one

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tool, its interest rates.

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Uh, and if you only have one, one bullet, as it were,

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you can't hit two targets.

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Uh, and in fact, if you try to hit two targets,

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if a central bank really does worry more about,

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the state of the economy, the, the growth rate,

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the unemployment rate, and so forth, it can go badly wrong,

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because a central bank that decides that it needs

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to support government borrowing

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or, support the deficit that, that a government has,

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that can rapidly snowball into increased inflation.

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So I, I do think that it's important

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that a central bank focuses not solely,

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not blindly on crisis controls,

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but that that's its main, its main task.

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And we have to remember that governments have other tools.

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You know, the fiscal policy basket is a much bigger basket

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than the monetary policy basket.

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Uh, the gov a government can raise

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or lower taxes, it can raise some taxes or lower other taxes

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and increase its spending in one sector or another.

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So it has many different ways

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to aim at the growth objective.

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And indeed, our current government is making growth.

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Its, its primary objective.

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So this will be an, an interesting case,

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and if it works that that fiscal policy encourages growth

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and monetary policy, keeps inflation under control, then

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of course that's, that's the holy grail.

Quick Answers

Navigating Inflation and Growth Challenges

00:00:14 - This week we explore how the Bank of England is grappling with inflation, slowing economic growth and a labor market that's facing increased job cuts. Amid all these challenges, can the bank achieve its inflation target without stifling recovery? Joining me today are two experts in the field of monetary policy and economic strategy. Jonathan Haskell, professor of Economics at Imperial College London, and a former member of the Bank of England's Monetary Policy Committee. Welcome, Jonathan. Thank you very much for having me on. Julia Dame Deanne Julius Distinguished fellow at Chatham House,

00:00:47 - of England's Monetary Policy Committee. Welcome Dame Deanne. Thank you. Nice to be here. It's a pleasure to have you both here. Let's start with you, Jonathan. The Bank of England faces a difficult policy dilemma with rising inflationary pressures amid a weak job market. Recent reports show businesses are cutting jobs at their fastest rate in years, and inflation has edged up again with the bank's. Next rate decision looming. Market expectations are high for a cut, but inflation remains above target. How does the Bank of England navigate the tension

00:01:20 - and supporting economic growth? Thank you, Julia. You're, you're quite right to highlight in your introduction that the Bank of England faces a particularly tricky source of navigation here. and the crucial question is the extent to which the adverse headwinds that there are, there are, especially around the labor market and around the amount of activity, will pull down inflation naturally, because, as you say, there's quite a lot of momentum in the current inflation.

Inflation Target and Policy Dilemma

00:01:54 - that the labor market is getting, a little looser, consumers are getting, a little bit more pessimistic, if that momentum is removed, then all, all those things will do the work, that the Bank of England needs to do sort of for it. If you sort of, if you sort of would see what I mean. And that would give you a, a cut in interest rates probably tomorrow, and then maybe not too much, more that needs needs to be done. on the other hand, if those,

00:02:24 - then the Bank of England has got much more of a problem. it has a remit, as you know, for a 2% inflation rate, and it would be unwilling, I think, to tolerate a long period of time of inflation above its 2% level. So it's all to play for, and as I say, I think it crucially depends upon how strong those headwinds are. Given that inflation remains above target, how will the bank balance short-term relief with the long-term risk of inflation expectations becoming de anchored should the

00:02:54 - The bank's always been very, very clear, at least the time when I was on the MPC, and Dan can speak for her time, the bank's always been very clear that the inflation target is the inflation target, and that's the bank's central job to hit that target. now the, I don't think there's much evidence that inflation expectations are getting out of control. Of course, two years ago when inflation was 11%, that was quite a worry. But inflation is close to target at the moment. So I think inflation expectations getting out

Navigating Inflation and Job Cuts: Bank of England's Policy Challenge

00:03:28 - What's much more in their mind, I think, is how gradual they'll want to be in their path of interest rates, cuts to get them back to the target, which is what they wanna hit. The UK's labor market is showing signs of strain with job cuts rising sharply, particularly in services sectors. This is happening against a backdrop of a sluggish economy and stubborn inflation. Dame Deanne, with a stagnating economy and inflation still on the rise, what policy measures can the Bank of England take

00:03:58 - Should there be a stronger focus on job growth, or is the priority still inflation control? Well, Julia, the priority certainly is inflation, as Jonathan said. That is the mandate that the government has given the Bank of England, to hit that inflation target at 2%, the government sets that target. so I think the, the remit for the Bank of England is, is pretty clear, even though, as you say, it's a tricky time because the economy is certainly slowing, while inflation seems to be a bit stuck actually, at

00:04:31 - Now, of course, the Bank of England doesn't just say, if, if it's above 2%, we, we then raise, or we certainly don't cut. It looks at the reasons why it thinks inflation is what it is. And one way to do this is to think about the different parts of the economy. If you look at the household sector, for example, they're actually receiving wage growth that's higher than inflation. So real wages are going up in, in real terms, and in fact, maybe going up a little bit too much, in

Balancing Economic Sectors During Weakness

00:05:05 - but that will support consumption in the household sector. It's the business sector that is really, very low, very weak, has very weak confidence since the budget. It's being hit with quite substantial cost increases. That of course, cuts into profits. And if you don't have profits, you don't have investment. so the business sector is the weak part of the economy. And the third sector is the public sector, which has been promised quite a big increase in spending

00:05:35 - there's pressure to increase for spending on defense. so the government sector, the public sector, is, is pretty strong in terms of its, its, growth at the moment. And, and that means that the big picture, really is that inflationary pressures are still fairly fundamentally there, particularly in the government sector, fiscal spending, but also in the household sector with wages being what they are.

00:06:06 - as it does and try to make a, a balanced decision, whether it, whether the economy is slowing down enough that they can afford to cut, which as you say, the markets expect, or whether indeed they ought to stick where they are for the time being. As the job market weakens. Do you think the bank will be under pressure to ease monetary policy sooner? Well, I think I would take a little bit of exception with, with your statement that the, labor market is weakening substantially. It, it may, but at the moment, unemployment,

Unemployment and Inactivity Rate Analysis

00:06:38 - that's probably pretty close to full employment, especially given how high the inactivity rate is. The people who, are in the age range of the labor market, but are not looking for a job. So I wouldn't say that at the moment there's a huge problem. There's, not evidence of a particular problem right now with unemployment. I guess the, the issue is that,

00:07:10 - it would be, and, and therefore cut rates, more dramatically, it would be incurring additional risks. Some of them might be, as you mentioned before, the, the un anchoring, the de anchoring, whatever the right word is, of the inflation expectations. But I think more likely it is just that there's so many uncertainties out there in the international market, uncertainties about what happens

00:07:41 - the, the problems from the Ukraine war uncertainties about the new US president and what he may do with tariffs. so this is a time to be a bit cautious in, in my view, rather than to be too aggressive. And I think that probably will weigh somewhat on the minds of the MPC members. And I'd add, unfortunately, there's an additional source of uncertainty, which is around exactly what the labor market is doing.

Uncertainty in Labour Market Data and Responding to External Factors

00:08:10 - quite whether the labor market is deteriorating or not is rather difficult to say, because unfortunately, as, as people will know, the labor force survey upon which, in Britain, we rely, to get a good picture of the labor market, has suffered from very low response rates recently. and it's become increasingly difficult for the Office of National Statistics to give a picture to, well, citizens in general, but the monetary policy committee, in particular, and I'm afraid that's another source of uncertainty,

00:08:41 - as Diane was just saying, for being a bit cautious, and maybe going a bit more slowly, than the bank might otherwise do. As the UK faces challenges both domestically and internationally, how should the Bank of England respond to external factors such as global supply chain disruptions, energy prices, and geopolitical tensions? These issues seem to be playing a significant role in inflation, even as domestic economic conditions remain weak.

00:09:11 - factors such as energy prices and geopolitical instability? Thanks, Julia. Let, let me say a word, if I may, about energy prices, and perhaps I'll pass to Diane, who's the expert on, the, the, the, the, the more kind of global policy types of issues on energy prices. The way the banks' models work is there is a very fast transmission from energy prices into inflation, and that lasts quite a long time, actually.

Navigating Energy Prices and Geopolitical Challenges

00:09:44 - if they're very marked and look like they're gonna last for, for a while, will have to be offset by appropriate interest rate changes. Now, figuring out those changes of energy prices is quite difficult, of course, because, on the one hand, you know, there may be geopolitical events which raise the price of oil and all of that. On the other hand, if world demand slows down, then typically energy prices and commodity prices in general go down as well. So it's not clear which way they are gonna go.

00:10:16 - And then as far as the sort of broader geopolitical issues are concerned, I think that's a very difficult balance between whether we think that those would be inflationary, you know, because of tariffs and increases in import prices, or whether they think they would be overall deflationary, because of, you know, a trade war and the result of resultant effects on kind of world demand. So, I I, I, I, I bow to Dan, who's I'm sure much more expert on these things than I am.

00:10:48 - although, perhaps I spend more time reading and listening to, podcasts and so forth about some of these geopolitical things in connection with Chatham House, whether that makes me any wiser or any better predictor, I, I really doubt, I, I think though that it is the case that this may be something that the bank should consider doing some scenario work on. in, in the last few inflation reports, as, as we know, they have, talked about three different scenarios and said, which one is their base case?

Exploring Extreme Scenarios: Prioritizing a Dual Mandate

00:11:19 - but the case on which the model, is, is calibrated. this may be a situation where there needs to be, a rather extreme scenario, test case, if, Trump does indeed succeed in provoking a global, trade war and what that means for, for different economies. And indeed, if I could just add to that in a recent speech, Alan Taylor, who's the most recent member

00:11:50 - a really, really good addition. He had a fourth scenario, which was the three scenarios that Diane me mentioned, plus a fourth, much more adverse scenario in terms of demand showing a much bigger slowdown, and a bigger slowdown in, inflation and a severe undershoot of the inflation, target. So there may be some reason for pulling in Alan Taylor's fourth scenario, to your point, Dan,

00:12:22 - So some of that groundwork actually at least has been laid In light of these ongoing global pressures. Do you think the bank should still prioritize a dual mandate in that it addresses both inflation and growth, similar to the Federal Reserve's approach, or continue focusing primarily on inflation? Well, I think the, the Federal Reserve, sometimes they're helped by having a dual mandate, because whatever they decide to do, they can say they're focusing on one end

Favoring Single Mandate Over Dual Mandate

00:12:52 - on the other hand, it seems to me as a, as a formal central, former central banker, I am actually a firm believer in a single mandate. now of course, our single mandate, about controlling inflation, about price control also has, supporting the government's policies, as a, as a secondary, but relevant decision, the trouble with a dual bandaid is that the, the Central Bank really only has one

00:13:24 - and if you only have one, one bullet, as it were, you can't hit two targets. and in fact, if you try to hit two targets, if a central bank really does worry more about, the state of the economy, the, the growth rate, the unemployment rate, and so forth, it can go badly wrong, because a central bank that decides that it needs to support government borrowing or, support the deficit that, that a government has,

00:13:57 - So I, I do think that it's important that a central bank focuses not solely, not blindly on crisis controls, but that that's its main, its main task. And we have to remember that governments have other tools. You know, the fiscal policy basket is a much bigger basket than the monetary policy basket. the gov a government can raise or lower taxes, it can raise some taxes or lower other taxes and increase its spending in one sector or another.

Balancing Growth and Inflation

00:14:44 - to aim at the growth objective. And indeed, our current government is making growth. Its, its primary objective. So this will be an, an interesting case, and if it works that that fiscal policy encourages growth and monetary policy, keeps inflation under control, then of course that's, that's the holy grail.

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