David Milliken

LONDON (Reuters – Tuesday’s warning by the International Monetary Fund to Bank of England was to prevent an ‘inaction bias” in its approach to reducing price pressures. The fund said British inflation would reach a record high of 5.5% next, a rise of 30 years.

According to the IMF, Britain had emerged stronger than it was expecting from the COVID-19 pandemic. But, Omicron’s latest variant is likely to slow down the recovery process over the next three-months.

BoE stated that inflation rates for consumer prices – at 4.2% currently – will have to increase in order to reach its 2% goal.

It held back from the widely anticipated rate increase last month because of concerns about the effect of the government’s job furlough program ending on September 30th. And it will likely do so again Thursday, due to the Omicron variation.

According to the IMF, “Monetary Policy also plays a critical role in managing volatility. However, it could be subject to difficult trade-offs.”

In light of the costs involved in limiting second-round effects, it would be prudent to avoid “inaction bias”. It said that careful communication is necessary to establish the foundation for markets in order to make possible more frequent policy changes.

Additionally, the BoE must “take advantage of every opportunity to place the quantitative tightening programme on a pre-programmed track and to provide guidance to the Bank regarding the structure to guide the process towards the steady balance sheet”.

This week, the BoE will complete 895 billion pounds of asset purchase. It has also announced that it will cease reinvesting proceeds from maturing bonds once the Bank Rate rises above 0.5%.

According to the IMF, its October forecasts that Britain’s GDP would increase by 6.8% this Year and 5.0% in 2022 were unchanged. After shrinking by 9.8% in 2020 due to the COVID-19 pandemic, Britain’s economy shrank by an historic 9.8% in 2019.

The British government should consider restoring support for its furlough program and additional assistance to the most vulnerable households, if necessary. However, it should not treat furlough as a permanent tool in its arsenal.

Also, it is worth considering a fiscal tightening plan for next year and increasing the tax burden on those in the top fifth to help fund additional investment in infrastructure, skills, and decarbonisation.