Bank of England accused of ignoring inflationary 'red flags'

investmentweek.co.uk:

There were second rounds effect the Bank of England 'has chosen not to acknowledge quite early on'.

At a Treasury Select Committee hearing today (5 July), the panel of experts recognised forecasting was incredibly difficult, and there had been warning signs inflation was going to increase quite significantly that the BoE ignored.

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Stephen King, senior economic adviser at HSBC, told the Committee the Bank had tried to argue inflation was going to be transitory, but there were second rounds effect it «has chosen not to acknowledge quite early on».

He argued there had been warnings last quarter of 2020 that there was the possibility of high inflation which were not recognised in the BoE's models.

King explained one of the warning signs was inflation surprising on the upside compared to weak economic activity in early 2021, which had not happened in over 30 years.

Other economic indicators at the time included an «incredibly powerful» growth in money supply in 2020, which he deemed off the scale compared to what had been previously seen, and something that should have been considered as a «red flag».

Sushil Wadhwani, a former member of the MPC, agreed with King's analysis, adding the BoE's forecasts were not consistent with money supply growth alongside the successful vaccine trials, which would have led to lockdowns ending and the normalisation of velocity of money.

He told the panel that during his time at the MPC, models were often cross-checked with other factors, and he believed the BoE forecasts did not take into considerations some of those warning signs at the time.

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