BoE points to ‘unexpected strength of inflation’
LONDON: Bank of England deputy governor Charlie Bean declared that UK inflation had been running above the 2% target for "an uncomfortably long time".
Mr Bean appeared to strike a slightly more hawkish tone than of late during a speech at a seminar in London. He highlighted the risk that the period of "elevated" annual UK consumer prices index inflation "causes medium-term inflation expectations to drift up, leading to higher rates of increase of both wages and prices". Mr Bean added: "Given the unexpected strength of inflation in recent months, this risk has probably increased of late.
"So we shall be watching these indicators (of household and financial market participants' inflation expectations), and their impact on wages and prices, like proverbial hawks." He did not signal any desire for immediate tightening of UK monetary policy. He highlighted factors which could bear down on growth and expressed his belief that annual UK CPI inflation, which stood at 3.2% in October, should fall back to near the Bank of England Monetary Policy Committee's 2% target "beyond the end of next year". His emphasis on the danger of inflation seemed stronger than of late. UK base rates have been at a record low of 0.5% since March last year.
The Bank's nine-strong MPC has also implemented a £200bn boost to UK money supply to stimulate economic activity. Mr Bean, although flagging up high inflation, also highlighted the weakening of UK consumer confidence through this year. He cited household fears over public spending cuts and tax hikes as a possible explanation. He warned there could be further adjustment of household behaviour in response to the fiscal consolidation programme which has been outlined by the Conservative-Liberal Democrat Coalition Government.
In his June Budget, Chancellor George Osborne announced an additional £40bn of annual public spending cuts and tax hikes by 2014/15.
This was on top of the £73bn of annual fiscal consolidation proposed on this timescale by the former Labour Government. Mr Bean said yesterday: "The prospects for household spending through next year and beyond depend crucially on households' expectations of their future incomes, as well as their balance sheet positions. "Consumer confidence measures have generally weakened through this year, possibly reflecting concerns about the prospective fiscal consolidation. -PB News