Bank of England was expecting ‘bumps’ as economy reopens, official says as inflation surges

Mounted police officers sit in outside the Royal Exchange and the Bank of England in London on June 17, 2020.

TOLGA AKMEN | AFP via Getty Images

LONDON — The Bank of England was expecting “bumps in the way” as the economy reopened after the Covid-19 pandemic, Deputy Governor for Financial Stability Jon Cunliffe has told CNBC, after U.K. inflation came in hotter-than-expected once again in June.

The U.K.’s latest inflation prints on Wednesday morning came in ahead of expectations, with the consumer price index up 0.5% month-on-month for June versus a Reuters poll consensus of 0.2%. This represented a 2.5% annual climb, the highest since August 2018 and up from 2.1% in May.

The central bank has projected that inflation will peak above 3% by the end of the year as the economy bounces back from its historic decline in 2020, but will be transitory and does not require a hawkish pivot in monetary policy.

“One shouldn’t expect the reopening of the economy to be smooth, this is not something that you can just close down and reopen without bumps in the way,” Cunliffe told CNBC’s Joumanna Bercetche.

He added that the central bank had long been expecting a “burst in demand” as households unleashed a lot of the involuntary savings accumulated during long periods of strict lockdown measures. Meanwhile constraints to supply in both the goods and services sectors, along with the labor market, have added inflationary pressure.

Bank of England Governor Andrew Bailey said earlier this week that the rapid rollout of the U.K.’s vaccination program has boosted the country’s economic outlook, even as it battles surging cases of the highly-transmissible delta variant of Covid-19.

The Bank held its monetary policy steady at its last meeting — keeping its main lending rate at a historic low of 0.1% and its asset purchase program at its current £895 billion ($1.3 trillion) level — but vowed to monitor rising inflation.

On Tuesday, the Bank also scrapped its pandemic-era restrictions on banks paying dividends, saying its stress tests had confirmed that the likes of HSBC, Barclays and other major lenders had ample capital to survive the economic fallout from the pandemic.

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