Bank of England rate setter: We project a mild recession for this year

What are the main benchmarks for central banks this year regarding avoiding recession?

The primary remit of the Bank of England is to achieve a 2% inflation rate at all times, with an additional objective of trying to avoid too much volatility in GDP.  As discussed in my keynote speech at Lámfalussy Lectures,

an important challenge facing the Bank of England at this juncture is erosion of the supply side of the economy, with a fall in the labor force participation rate and weak productivity associated with reduced trade and business investment.

Combined with the real income squeeze significantly associated with the energy shock and rising food prices, as well as the pursuit of the primary remit, we project a mild recession for the year.I am looking for turning points in the data to chart a policy path that is mostly likely to achieve the objectives.  

What kind of similarities do you see in comparison with the inflation of the 1940-'s and the 1970's?

There were energy shocks in the 1970s, as has been the case in the past year. But this time, the energy shock came just as economies were emerging from the Covid shock, which had raised goods prices. And now food inflation is surging as well.

So successive very large shocks and multiple sources of inflationary pressures. The UK as well has been implementing Brexit.

As discussed in my keynote, in the UK, an important difference from the 1970s is that real interest rates have been rising somewhat. During the 1970s, despite rising nominal interest rates, real interest rates fell, which ended up stimulating the economy and inflation rather that restraining them. Of course back then, the Bank of England was not independent and did not have an inflation-target remit. 

What is your opinion about taming high food inflation?

As discussed in the Monetary Policy Report issued last Thursday, food prices are making an increasingly large contribution to CPI inflation in the UK. The main reasons for the surge is global factors including supply constraints and rising energy and fertilizer costs in food production, largely caused by the war in Ukraine, as well as poor weather conditions. Higher input costs appear to have been passed through to food prices faster than is usually the case, perhaps because of the scale of the shock and its global nature.

Although food clearly is an essential, there are ways that households can adjust such as changing what’s in the shopping basket, including changing brands. These are facilitated by having competition in food availability. 

What is your opinion about the missing Eastern European workforce in Great Britain after Brexit?

At the Bank of England, ONS estimates for population, including immigration, are used as the top-line figures that are incorporated into our projections. That said, I’m from America, a nation of immigrants and economic research finds that immigrants add to both labor supply and demand, and bring with them a diversity of culture, ideas, and skills that enrich the economy and society.