Government policy on public health, in the face of the most extreme pandemic for at least a century, led to deliberate lockdowns. Much of economic activity simply ceased. The important question we faced as monetary policymakers was what would happen when the restrictions were lifted as Covid abated. Would a synchronous and equivalent fall in demand and supply simply be followed by a synchronous and equivalent rise? At the time, I remember being asked quite often if the pandemic would leave scars on the economy: would there be any lasting damage to the economy? Bank of England  Page 14  As put, the question was about whether firms would be able to survive the prolonged economic impact of the pandemic, let alone continue to invest in the future – or whether millions would be driven into unemployment as the Government furlough scheme, which remunerated those whose jobs were in effect suspended, was set to end at the end of September 2021. This was by no means clear at the time. The furlough scheme was unprecedented and had been operating for 1½ years, and even firms were unsure of what the effects on recruitment would be, as they reported to the Bank’s Agents at the time. A key consideration for policy, therefore, was to ensure that supply would come back on stream, and for monetary policy in particular to ensure that there was sufficient demand in the economy to pick it up. What actually happened was quite different from what we had feared.
It is primarily for this reason that we expect to see a sharp fall in inflation during the course of this year, starting probably in a couple of months or so from now. Bank of England  Page 15  Growth in the economy has suffered too, as a consequence of the sheer scale of the hit to the terms of trade. There has been a very large impact on national real income, from which I am afraid there is no hiding. But there is better news on that front, the economy has been more resilient of late, helped by the sharp fall in energy prices. The same is true for the world economy more broadly. What does this mean for monetary policy looking forwards? The remit is clear. The adjustment and response to the shocks we have experienced must return CPI inflation to the 2% target sustainably. We must avoid these very large shocks leading to persistent inflation, and that is why we have raised the official interest rate eleven times, to 4.25%. Recently, the evidence has pointed to more resilient activity in the economy, and likewise employment; signs that nominal wage growth has been rather weaker than expected; and two months in which there was first some downside news on inflation relative to our expectation and then a bit more upside news. This reminds us that the path of inflation will not be entirely smooth and cost and price pressures remain elevated.