UK inflation trade-off worsens amid Ukraine invasion reports BoE’s Tenreyro

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Bank of England’s (BoE) policymaker Silvana Tenreyro stated that the spike in energy costs triggered by Russia’s invasion of Ukraine would hinder British economic growth as well as raising short-term inflation pressures.

Tenreyro said it was too early to know how the trade-off would play out and that policymakers would start to review this at March’s Monetary Policy Committee meeting and when the BoE next updates its predictions in May.

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Moreover, “Current developments will strengthen the terms of trade shock that we were already experiencing, so will push up inflation and have a negative impact on activity. How exactly? That’s the job we will start next week,” she said at a discussion organised by Britain’s Economic Research Council.

However, financial markets still predict the BoE to increase rates from 0.5% to their pre-pandemic level of 0.75% on March 17 and as high as 1.5 per cent by August as the central bank seeks to control surging inflation from becoming entrenched.

Furthermore, Tenreyro, who voted against the Bank of England’s first post-pandemic rate hike in December due to uncertainty about the threat from the Omicron variant of Coronavirus – said there was no good evidence that a wage-price spiral was taking root in the UK.

Last month, the BoE forecast that inflation would peak at 7.25 per cent in April before tensions between Ukraine and Russia escalated to a Russian invasion.

Tenreyro said she was surprised by the scale of wage rises anticipated for 2022 in a BoE survey of companies, which exceeded other surveys, and she was unsure if it would materialise.

She also stated that “When you are talking about spirals, you are talking about explosive dynamics, which we have not seen yet. If anything, we are just beginning the first round, so how can you talk about second round (effects).”

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