Bank of England Chief Economist Spencer Dale said U.K. inflation may not slow as fast this year as the central bank has forecast as tensions in the Middle East push up oil prices.
The Monetary Policy Committee’s central projection is that inflation is “somewhat more likely to be below” its 2 percent target than above it for much of the next three years. Dale said that while there are “good reasons” to expect price growth to slow, his outlook is “somewhat more balanced.”
“External price pressures might continue to push up on domestic costs and prices,” he said in a speech late yesterday in Aberystwyth, Wales. “One obvious worry in that regard is the possibility that tensions within the Middle East could escalate and put further upward pressure on oil prices.”
The comments echo remarks by Martin Weale, who said last month that inflation may prove more persistent than expected and suggested the central bank’s increase in stimulus in February may be the last. The Bank of England kept its bond-purchase plan and interest rates unchanged this month.
While Dale acknowledged that “the support being provided by monetary policy is likely to have to remain in place for some time yet,” he said policy makers will have to “remain mindful that there is a limit to what monetary policy can achieve when real adjustments are required.”
“Mr. Dale’s relative hawkishness is not surprising -- he was voting for a rate increase last year,” said Simon Hayes, an economist at Barclays Capital in London. “We would not expect him to support any further expansion of quantitative easing in the coming months.”
The pound slid for a third day against the euro today before Chancellor of the Exchequer George Osborne presents his annual budget. It depreciated 0.1 percent to 83.47 pence per euro as of 7:52 a.m. London time. It was up 0.1 percent against the dollar at $1.5884.
Dale said the pound’s decline over the past few years will aid the rebalancing of the British economy. Sterling has declined about 23 percent on a trade-weighted basis since the start of 2007.
“The lower exchange rate should help to drive that process,” he said. “Even so, it’s likely to be a slow and challenging journey, especially while it is played out against the current backdrop of weak demand.”
Inflation slowed to 3.4 percent in February from 3.6 percent in January, the Office for National Statistics said yesterday. The easing was less than economists forecast and left price growth above the central bank’s 3 percent upper limit.
Dale said the pace of the economic recovery is “likely to remain weak in the near term,” helping push down domestic price pressures. Still, the U.K. is “not out of the woods” and the longer-term outlook is less clear, he said.
“There are still a few more base effects to drop out of the annual calculation over the next couple of months,” Dale said. “What is far more uncertain, and far more important for the path of monetary policy, is how far and how fast inflation will fall thereafter.”
Crude-oil prices have increased about 24 percent in the past six months on concern that European Union and U.S. sanctions against Iran’s nuclear program will disrupt Mideast exports. In addition to oil prices, Dale pointed to risks to inflation from weak productivity growth and the possibility that companies may try to rebuild profit margins.
The MPC bank kept its bond-purchase target at 325 billion pounds this month after increasing it by 50 billion pounds in February. The Bank of England will publish the minutes of the March meeting, which will show how the nine policy makers voted, at 9:30 a.m. today.
“There is a delicate balancing act to manage,” Dale said. “The best contribution that monetary policy can make to the long-run health and sustainability of our economy is to ensure that inflation remains on track to hit the 2 percent inflation target.”
-- Editors: Fergal O’Brien, Simone Meier