Bank of England’s Haldane warns of inflation; Bond yields are rising

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Andrew Haldane, Chief Economist at the Bank of England and Executive Director, Monetary Analysis & Statistics

Chris Ratcliffe | Bloomberg via Getty Images

UK bond yields rose on Friday after Bank of England’s chief economist Andy Haldane warned that inflation could be difficult to tame, leading to more assertive policies.

In a taped talk released Friday, Haldane noted that there are both upside and downside risks to the inflation outlook, but cautioned that an inflationary “tiger” had woken up.

“The combined effects of unprecedentedly large shocks and unprecedented levels of political support woke it up. In this environment, the act of tigers that central banks are facing is difficult and dangerous,” said Haldane.

Global markets have been nervous for the past week on a spike in US 10-year Treasury yields, partly due to rising expectations for inflation and economic growth as Covid-19 vaccines roll out and potentially spark pent-up consumer demand.

Earlier this week, Federal Reserve Chairman Jerome Powell attempted to allay concerns that the Fed would tighten monetary conditions in the face of rising inflation. Powell pledged to maintain his unprecedented accommodative stance adopted to bring the economy out of the coronavirus crisis and forecast that inflation and employment would remain below target.

Haldane, considered the most hawkish member of the Bank of England’s (MPC) Monetary Policy Committee, recognized the possibility that inflation will stabilize as vaccines come in and things return to normal. He added that disinflationary forces could return even if pandemic risks persist.

“But for me there is a palpable risk that inflation will be more difficult to tame as policy makers need to act more decisively than is currently the case in financial markets,” he said.

“People rightly warn of the risks of central banks being too conservative by tightening policies prematurely. However, the greater risk for me right now is that the central bank will be complacent and let the inflationary (big) cat out of the bag. “

The UK 10-year gilt yield rose to 0.816% after the speech was released, while the 5-year and 2-year gilt rates rose to 0.396% and 0.121%, respectively.