Andrew Bailey, Bank of England Governor, issued a new signal on Sunday that the British central bank is gearing up to raise interest rates for the first time since the outbreak of the coronavirus epidemic as inflation worries mount.
Bailey continued to believe that the recent rise in inflation would be temporary, but that a rise of energy prices would push it higher and make it last longer, raising inflation expectations.
"Monetary policy cannot solve supply-side problems - but it will have to act if we see a risk, particularly to medium-term inflation and to long- term inflation expectations," Bailey said during an online panel discussion organized by the Group of 30 consultative group.
"And that's why we at the Bank of England have indicated, and this is another example, that we will have to act," he added. "But, of course, that action comes in our monetary policy meetings."
The BoE has forecast that Britain's inflation rate will rise to over 4%, more than double its target, as the world economy reopens from its COVID-19 lockdowns, causing shortages of supplies and workers, and the price of energy rises.
Investors are speculating that the BoE might become the world's largest central bank to raise rates later this year or early in 2022.
Bailey said that the demand for workers in Britain had been higher than anticipated, and that both young and older workers leaving the job market had risen.
"I have concerns about labour supply growth," he added.
But Bailey said he did not believe there was a "general pattern of labour market pressure" as wages soared strongly in some sectors but less so in others.
He said there were lessons for governments seeking to prevent future supply chain shocks in the same way financial regulators had responded to the global financial crisis of 2007-09, including regular stress tests, for example.
"I'm not saying that we have the answer to supply chains across the board, but I think that there are lessons that have been learned in terms of resilience that can be usefully adapted and utilized and translated into some other markets, such as when I look at energy supply," he added.