Barker Says Bank of England Has Lost Some Credibility From Inflation Bout

The Bank of England may have suffered a setback to its credibility as it struggles to contain an inflation rate that has accelerated to almost twice its 2 percent target, former policy maker Kate Barker said.

“There’s a perception in business as well as in financial markets that the committee has perhaps been behaving in a different way coming out of the crisis and has tolerated inflation more than you might have expected,” Barker said late yesterday at an event hosted by Anglia Ruskin University in Chelmsford, England. Companies “probably have less belief that it will come back to 2 percent than in the good old days, and that’s a sort of modest loss of credibility.”

Soaring food and energy costs and an increase in sales tax lifted U.K. inflation to an eight-month high of 3.7 percent in December, the 13th month it’s been above the target. Surveys this week showed price pressures intensified in January among service, manufacturing, and construction companies.

The outlook has split the nine-member Monetary Policy Committee, which has maintained emergency stimulus as the government’s fiscal squeeze takes hold. While Governor Mervyn King said last month that price gains will slow to the target, Andrew Sentance was joined by Martin Weale at the January policy meeting in a vote to raise the benchmark interest rate from a record low 0.5 percent to tame inflation.

Barker, who stepped down from the MPC at the end of May after serving three consecutive three-year terms, said there is a risk the bank may lose credibility in a “more profound way” and that the dilemma it faces “has got worse” since she left.

‘Confidence Trick’

“If you believe inflation is going to come back to 2 percent, you are going to behave as if that’s going to happen when you’re setting wages and setting prices,” she said. “Once you start to think this monetary policy isn’t all that it’s cracked up to be, and things need to be changed in some way, then things inevitably become more difficult.”

“It’s like a confidence trick,” she said.

The pound rose as much as 0.2 percent against the dollar today. It was little changed at $1.6130 as of 10:02 a.m. in London. The U.K. currency has gained 1.7 percent this week.

King forecast last month that price gains could accelerate to more than 4 percent in the coming months before returning to the goal. Still, Barker said she doesn’t see the bank losing credibility “in a big sense,” with prices moving “completely out of control.”

She also said that while the recovery seems to be under way, the economy still faces risks from turmoil in sovereign- debt markets and the U.K. government’s spending cuts. Still, people should take optimism from companies’ capacity to invest and a “strong” global economy.

“We haven’t laid all the risks to bed in the financial system,” she said. “If you were thinking of the crisis as a game of football, we’re in about the 60th minute. Things are still going reasonably well, but there’s always a chance of some sneaky goals from the opposition.”

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.