Bank of England's divisions resurface on UK economic outlook

[LONDON] With confidence growing that a recovery is just around the corner in the UK, divisions are hardening at the Bank of England (BOE) over how the economy will unfold.

Those splits were on display in a series of appearances by members of the Monetary Policy Committee (MPC) this week. They pit BOE Chief Economist Andy Haldane, who believes Britain is set for a rapid recovery, against officials including Silvana Tenreyro who say another jolt of stimulus may yet be needed.

"Who's right? It's too early to say," Sanjay Raja, an economist at Deutsche Bank, wrote in a note to clients. "We won't know the answer until we're deeper into the recovery. We should get a real sense of both the scale and scope of the recovery by the fourth quarter."

The divergence reflects the huge uncertainty facing an economy emerging from its deepest slump in over 300 years. Optimism that the worst is past and that policy makers may soon turn to controlling inflation sent bond prices plunging in recent weeks, lifting the yield on gilts past where they were a year ago when the pandemic started. This week's debate took the edge off some of those gains.

Hanging over the outlook are doubts about whether Prime Minister Boris Johnson's government can stick to its ambitious goal of immunising almost all adults by the middle of the year.

While ministers are set to loosen pandemic restrictions, a dispute with the European Union and AstraZeneca over shipments of the vaccine threaten to slow the programme.

"Despite lessening downside risks, there also remain a number of scenarios that I would anticipate requiring looser policy later this year," Ms Tenreyro, an external member of the BOE's rate-setting panel, said in a speech to the US Federal Reserve Bank in San Francisco on Friday.

That remark contrasted with Mr Haldane's hopes of a "rip-roaring recovery" when he spoke to ITV earlier in the week.

Others on the MPC highlighted reasons to wait before acting. Michael Saunders said working from home and online shopping may have given the UK a dose of additional productive capacity, suggesting the economy can grow longer without reviving inflation. He said he'd need to see a sustained rise in prices before voting to tighten policy.

"There's clearly pent-up demand and a bigger boost will come when restrictions are eased further. Consumer spending will also benefit once the closure of the hospitality and leisure sector ends," said Dan Hanson of Bloomberg Economics.

The latest government data show little threat of inflation taking off, despite a forecast from the central bank that the 2 per cent goal will be reached later this year. Consumer prices rose a smaller-than-forecast 0.4 per cent in February from a year earlier, extending a 1 1/2-year stretch below target.

Mr Saunders said he put more weight on unemployment figures as a gage of the excess slack in the economy than inflation, noting that a rebound won't be seen as sustainable so long as the jobless rate is above 5 per cent - the level prevailing in the quarter through January.

BLOOMBERG