"The monetary policy response, if we need to make one, to the inflation pressure should involve Bank Rate not QE."
Speaking to the Society of Professional Economists during an annual dinner, Bailey jokingly asked "when are the locusts due to arrive?" after discussing how the economic fragility created by Covid has amplified the impact of other shocks - "either that or the gods really are against us", he added.
Bailey added: "I remember saying, around a year ago when the recovery looked rapid, that the hard yards were yet to come, and while I don’t want to claim any great prescience, it appears to be turning out that way.
"The switch of demand from goods to services, as Covid has faded in terms of its economic impact, has not taken place to date on the scale expected. Meanwhile, supply bottlenecks and labour shortages have weighed on output, and are continuing. Indeed the number of high profile supply bottlenecks appears to be increasing."
Turning to inflation, Bailey noted that the Bank's forecasts have inflation rising to 4% by the end of this year, and he says developments since then mean that inflation is likely to rise to slightly above 4%.
He said the Bank still believes that current price pressures will be transient and above target inflation will be temporary, but warned that "the pressures are very much still with us".
He added that "the monetary policy response, if we need to make one, to the inflation pressure should involve Bank Rate not QE".
Bailey said: "Monetary policy will not increase the supply of semi-conductor chips, it will not increase the amount of wind (no, really), and nor will it produce more HGV drivers. Moreover, tightening monetary policy could make things worse in this situation by putting more downward pressure on a weakening recovery of the economy."
Despite this, he said that all nine MPC members believe that the stimulus to monetary policy enacted in response to Covid "would need to start to unwind at some point, that unwind should be enacted by an increase in Bank Rate, and if appropriate would not need to wait for the end of the current asset purchase programme".
Bailey concluded: "All of us believe that there will need to be some modest tightening of policy to be consistent with meeting the inflation target sustainably over the medium-term. Recent evidence appears to have strengthened that case, but there remain substantial uncertainties and we are monitoring the situation closely."
