Weale Says BOE Should Look Through Downside Risk to Inflation

Bank of England policy maker Martin Weale said officials should look through any downside risks to U.K. inflation in 2016 posed by falling energy costs and focus on price risks in the longer term when setting interest rates.

In a speech analyzing the impact of sharp oil-price changes, Weale said it’s possible the drop late last year may push down on consumer prices by more than the BOE anticipates. Nevertheless, this shouldn’t sway the central bank’s Monetary Policy Committee from its longer-term focus to get inflation back to its 2 percent target.

“By early 2017 I believe the effect will have faded,” Weale said on Thursday, referring to the drop in energy bills. “So the best response is not to worry about this risk should it materialize; after all, policy is set now in order to deliver inflation at target in two years’ time, by which time the effect is likely to have gone.”

Britain’s inflation rate fell below zero in April for the first time since 1960, largely reflecting a drop in energy and food costs. Governor Mark Carney has said the weakness will be short lived and a pickup in price growth is expected toward the end of this year.

Weale also said the impact of weaker oil prices on economic growth may be stronger than expected.

Weale, along with Ian McCafferty, voted in a minority for interest-rate increases from August to December, citing risks from an increase in pay growth as the economy recovers. Both dropped their vote in January as inflation slowed, and Weale’s speech gave no hint as to when he might resume his call.

“I think the committee is quite right to let the short-term effects of external shocks feed into inflation, even if this pushes it far from target,” he said. “To do otherwise, and tighten or loosen aggressively, would do little to help inflation in the short term, but would risk a lot with unwanted gyrations in output.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE