BoE's Broadbent says COVID had less inflation impact than expected

LONDON: Britain's coronavirus pandemic is likely to have limited long-run impact on inflation, and has led to less short-term downward pressure on prices than might have been expected from the slump in headline economic output, Bank of England Deputy Governor Ben Broadbent said on Tuesday.

Broadbent said the smaller slowdown in inflation reflected shifts in consumer demand during the pandemic that had led to temporary capacity constraints in businesses, as well as support to household incomes from government furlough schemes.

"The consequences for cost pressures over the medium term - and therefore for monetary policy - are probably limited. But this divergence in demand may help to explain why, at least on impact, the pandemic has depressed inflation by a bit less than we and others anticipated when it began," he said in a speech.

Broadbent focused on the big gap between the historic fall in British economic output last year - which he said was on track to be the biggest since quarterly records began in 1920 - and a counterintuitive rise in retail spending.

Many households' incomes had been supported by government furlough programmes, and some spending on entertainment had shifted instead to audiovisual goods for people to enjoy at home, Broadbent said.

"Consumers used some of the money they would have spent on riskier activities - going to restaurants and so forth - to buy other things instead," he said.

Unemployment and other labour market developments were likely to offer a better guide to medium-term inflation pressures, Broadbent said.

"Because, unfortunately, we expect unemployment to rise once the furlough schemes are wound down the appropriate response has been to ease policy significantly," Broadbent said.

"The Committee has also said that it would need firm evidence of a significant narrowing in spare capacity, and of a sustainable return of inflation to the 2% target, before considering whether to withdraw any of this stimulus," he added.