Bank of England Deputy Governor Charles Bean said he favors delaying interest-rate increases to tame inflation while the economic recovery remains fragile.
“I would not strive to get inflation back to target as soon as I possibly could, because that would mean, if interest rates were higher, slowing the recovery,” Bean said in an interview with The Times newspaper in London published today. “I would be willing to accept a slightly longer period of inflation running a little bit above target in order to match that margin of unused resources.”
The U.K. economy shrank 0.6 percent in the fourth quarter, while inflation accelerated in January to 4 percent, twice the central bank’s target. That’s split officials on the outlook for policy, with three of the nine-member committee calling for an increase to the benchmark interest rate.
“Upside risks to inflation are not the only thing we have to worry about,” Bean said. “We are in an economy which is recovering from a very deep recession indeed, where there is still a substantial margin of spare capacity, where unemployment is elevated.”
Bean also said there is a potential impact on executive and consumer confidence from the turmoil in the Middle East and the earthquake in Japan. Initially there will probably be a “depressing effect” on the Japanese economy.
“The power situation, with the prospect of regular power outages, will have more widespread implications,” Bean said. “A bit further down the road is when the rebuilding process gets underway; then you might see a bounce.”
Bean said the oil-price impact from the uprising in Libya “should be relatively modest,” though the spread of unrest in the region “could lead to a further substantial rise.”
That’s one of the “upside risks” to inflation, he said. Overall, it’s “reasonable to expect the rate of commodity-price inflation to ease back.”
He said the movement in U.K. longer-term inflation expectations remains “acceptable” and it may be the third quarter before policy makers have a clear picture of the sustainability of the recovery.
“If there is a strong first-quarter number you wouldn’t know if it’s just a temporary bounce because of people undertaking expenditure that they weren’t able to do when the snow was around or whether it indicates greater underlying strength,” he said. “You can solve that by waiting until we get the second-quarter data.”
Bean said policy makers are assessing whether the fourth- quarter slump “might indicate a more durable slowing, possibly connected with people becoming more concerned about the impact of the fiscal consolidation.”
“It is appropriate to wait until we have got a better handle on what the underlying strength of the recovery is and therefore a better handle on the prospect for the economy further down the road,” he said.
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