The UK could see inflation rise, as the Bank of England continues to print money in order to survive the coronavirus crisis, a top economist has cautioned.
David Blanchflower, who sat on the Bank of England's monetary policy committee from 2006 to 2009, told the Mail on Sunday: “The Bank of England will keep buying gilts until the market calls its bluff, but we are nowhere near that stage.
“That might happen if there is inflation, but at the moment there is no prospect of that. So it's all hands to the pump.”
Last month, the Treasury issued £45bn ($55.8bn) of Government bonds – or gilts – to raise money to get Britain through the crisis.
Analysts estimate the UK could end up issuing a total of £285bn of gilts this financial year.
Reports emerged last month suggesting that when the stock market crashed in mid-March the Debt Management Office, which organises the sale of gilts for the Treasury, was on the cusp of failing to complete a bond auction for the lockdown rescue package.
So the Bank of England stepped in to buy £200bn of gilts via its quantitative easing programme – a process that amounts to printing more money.
If that auction had failed it would have been the first gilt sale to collapse since March 2009, during the banking crisis.
While the UK has the headroom to take on more debt there are mounting fears over the government’s business loans and furlough schemes which are costing billions to maintain.
Chancellor Rishi Sunak will set out next week how he intends to unwind the job retention – or furlough – scheme, which is scheduled to end on June 30.
Sunak has promised there will be no “cliff edge” and his officials are working on a plan to phase out the scheme, including possibly making provision for furloughed staff to return to work part-time.