UK central bank policymakers are ‘duty’ when they meet this week to push the UK into recession to limit rising inflation, a former Bank of England (BoE) official has said. ).
Adam Posen, who heads Washington-based think tank the Peterson Institute, said while the Bank of England wouldn’t want workers to lose their jobs, it should raise interest rates now to take the pressure off inflationary aggravated by Brexit trade and immigration restrictions.
The BoE’s Monetary Policy Committee (MPC) meets on Thursday and is expected to raise interest rates by 0.25%, taking the central bank’s key rate to 1% – its highest level since early 2009. Inflation in March peaked at 7% – its highest level in 30 years.
Posen, who was a member of the MPC from 2009 to 2012, said the central bank needed to take more drastic measures after Brexit reduced the supply of labor in the UK and limited the flexibility of the workforce. Without a government U-turn on trade restrictions and immigration policy, the BoE must shrink the economy.
“The central bank has no choice but to cause a recession as a wide range of prices rises at such a rapid pace,” he said.
“It is its duty to bring down inflation after more than a year when it exceeded its target level of 2% by more than 2 percentage points during a period of full employment.”
He said wages were rising due to labor shortages and that would likely add to inflationary pressures for several years to come unless further interest rate hikes were imposed. He added that if wages failed to keep pace with inflation for the rest of the year, it showed that workers’ wage bargaining power was weak and there was even more reason to hold back. rising prices.
“There is a greater risk that inflation will persist without further action in the UK compared to other major economies. The US is going through a period of high inflation that monetary policy will stop. Eurozone countries don’t really have much inflation other than the spike in energy and food prices caused by the war in Ukraine.
“The UK, on the other hand, has Brexit, which will restrict the supply of labor in the long term, and trade restrictions which will keep prices higher than they otherwise would be,” he said. he declared.
Opinion is divided among City academics and analysts on the central bank’s next steps, with some, including Posen’s MPC predecessor, labor market economist Danny Blanchflower, saying rates need to stay low to protect an economy that is already heading into recession.
Blanchflower, a professor at Ivy League University’s Dartmouth College, said several recent indicators showed the UK was already heading into recession and it would be irresponsible for the BoE to give it any further boost.
But those calling for a succession of interest rate hikes this year say the faster pace of wage increases and high levels of savings among middle and upper income groups will mean demand will outstrip supply, generating even higher inflation. They say companies are running out of skilled workers and raw materials needed to meet demand and are likely to respond by raising prices further.
Labor shortages pushed vacancy rates to a new record high in the latest labor market figures covering the three months to February. The hardest-hit industries — IT, manufacturing, construction and hospitality — were those that relied the most on foreign-born workers, mostly from the EU, Posen said.
He added that the UK was “much more open to trade and immigration, and attractive to foreign investment ahead of the 2016 Brexit vote”.
Ken Rogoff, a Harvard professor and former chief economist at the International Monetary Fund, said: “A recession in Europe is almost inevitable if the war in Ukraine escalates, and China’s economy may already be in recession.
Writing on the Project Syndicate website, he added: “And with U.S. consumer prices currently rising at their fastest pace in 40 years, the prospects for a price soft landing without a big hit to the growth seem more and more distant.”
Last week, Brexit Opportunities Minister Jacob Rees-Mogg said Britain would postpone physical checks on fresh food imported from the EU for the fourth time, citing the likelihood they would cost UK businesses £1 billion in red tape.
A report released last week by researchers at the LSE Center for Economic Performance said the introduction of new post-Brexit trade rules last year had caused a ‘major shock’ to trade between the UK and Europe. EU.
The research found that UK imports from the EU fell by 25% compared to those elsewhere in 2021.
Its authors suggested that new rules have also caused many small businesses to end their relationships with EU-based suppliers and stop exporting to the 27-member trading bloc.