BOE’s McCafferty Sees Prolonged Period of Above-Target Inflation

  • Indicators show U.K. economy in a ‘slow-motion slowdown’
  • Policy maker forecasts sharp inflation pickup in 2017

U.K. inflation will accelerate quickly above the Bank of England’s 2 percent target and could stay there for a prolonged period, according to policy maker Ian McCafferty.

In a speech to a business group in the south of England, McCafferty said there are “limits” to how much officials will tolerate an overshoot above their 2 percent target, but any action must be weighed against its potential impact on the broader economy. He said the Monetary Policy Committee is as equally likely to tighten or ease policy in its next move.

“Quite where policy will go next will depend crucially on how the different cogs and wheels in the economy behave,” McCafferty said in remarks published Tuesday. “Inflation is expected to rise quite sharply, and to remain above the target beyond 2019,” while the economy is likely to “weaken over the period, pushing up on unemployment and widening the output gap.”

The expected jump in inflation is largely due to the pound, which has fallen 17 percent since the U.K.’s vote in June to leave the European Union.

At its last policy announcement on Dec. 15, the MPC said it could respond in “either direction” to changes in the economic outlook as officials work to balance the upswing in inflation with a cooling in growth. Known as one of the more hawkish members of the nine-member committee, McCafferty opposes the BOE’s bond-buying program, which was put in place as part of a package in August including a cut in interest rates.

His comments struck a somewhat more pessimistic tone on inflation than the minutes of the BOE’s most recent meeting, where officials said that the pound’s appreciation in November could soften the inflation outlook. In McCafferty’s view, “inflation is expected to rise quite sharply, and to remain above the target beyond 2019.”

McCafferty also said the bank’s response to price growth will depend on whether it spills over to the labor market, lifting wage demands and making inflation more entrenched.

— With assistance by Scott Hamilton

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