Bank of England Governor Andrew Bailey warned that China’s sudden lifting of Covid restrictions, the continuing fallout of the war in Ukraine and the shrinking of Britain’s labor force are high on the list of dangers facing the UK economy and inflation outlook.
(Bloomberg) — Bank of England Governor Andrew Bailey warned that China’s sudden lifting of Covid restrictions, the continuing fallout of the war in Ukraine and the shrinking of Britain’s labor force are high on the list of dangers facing the UK economy and inflation outlook.
Bailey said that China’s reopening, which has triggered a wave of Covid cases, will have “a negative impact in the short run” on the world’s second-largest economy, adding that officials at the UK central bank are keeping a “a very close watch.”
The declining pool of labor available to UK businesses threatens to derail a rapid fall in the inflation rate, Bailey told lawmakers in Parliament on Monday, as an ultra-tight jobs market spurs wage growth.
The remarks indicated Bailey’s caution in assessing whether the UK is moving away from the worst bout of inflation in more than four decades. It marks a contrast with the US, where inflation has been falling for months, fanning speculation that the Federal Reserve will pivot away from tightening monetary policy and think about rate cuts.
“Going forwards, the major risk to inflation coming down in the way that it will is the supply side,” Bailey said. “In this country particularly the question of the shrinkage of the labor force,” which has pushed up wages.
He also noted risks from Ukraine, since Russia cut off natural gas exports to Europe last year after it invaded its neighbor, and China’s reopening as surging Covid infections hit activity.
“First of all in the economic outlook it think it’s quite likely we will see a negative impact in the short run in China from what’s going on at the moment from the release of the Covid restrictions and the impact that’s having,” Bailey said. “I’m not sure that would be very long lasting.”
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