LONDON (MNI) – Bank of England Chief Economist Spencer Dale makes
clear in a speech tonight that he places more weight on upside inflation
risks than the central forecasts shown in the BOE’s latest Inflation
Report.

The BOE’s February Inflation Report showed the ‘best collective
judgement’ of the MPC was that inflation was likely to fall to below the
2% target by the end of 2012, with the risks throughout 2013 heavily
weighted towards it being below target. Dale, however, says that even
without oil price pressures the risks around the inflation target are
more balanced than the report shows.

Dale says in his speech:

“My own view is that the chances of inflation being above or below
2% by the end of this year and into 2013 are somewhat more balanced.”

Dale says that Mideast political tensions and potential domestic
cost pressures are behind his heightened worries on inflation.

“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”.

Pointing out that recent falls in inflation are down to the
increases in the price level last year, due to higher petrol prices and
the VAT hike, dropping out of the comparison, Dale adds, “we’re not out
of the woods yet”.

“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,” he says.

Dale noted that there are “good reasons for thinking that inflation
will continue to fall”, including “some degree” of slack in the economy,
primarily in the labour market as well as the fact that the pace of
economic recovery should remain muted in the near term.

“Those factors should continue to push down on domestic costs and
prices and so cause inflation to fall further,” he said.

Even absent another oil price spike and based on a maintained
stg325 billion of asset purchases and 0.5% Bank Rate, Dale, however,
still believes that “inflation is just as likely to be above as below
the inflation target in the medium term”.

These remarks will hardly come as a surprise to BOE watchers. Dale
has been clearly identified as a member of the hawkish wing of the MPC.
He voted in the minority for a rate hike from February through to July
2011.

REBALANCING AND MONETARY POLICY

Dale defends the decision of the MPC to significantly loosen
monetary policy despite high headline inflation, saying that this was
needed to avoid an even deeper recession and that the current “support
being provided by monetary policy is likely to have to remain in place
for some time yet”.

But Dale said that one had to be mindful that there are limits to
what monetary policy can achieve when real economic adjustments to the
economy are required.

Monetary policy’s role in assisting the rebalancing of the economy
away from a reliance on domestic demand faced a “delicate balancing act”
between supporting the economy against weak demand but avoiding sending
out the wrong incentives, Dale said.

The fall in the exchange rate of sterling had been “encouraging”
for that process, he said. Sterling, he noted, “has already moved
materially in the right direction”.

The fall in sterling since 2007 had provided “significant support”
to the traded sector – “exports have been boosted. Just as importantly,
the flow of imports into the UK has been dampened”.

Yet it could take a “considerable time” for the exchange rate drop
to produce its ‘full’ effect as companies had to be assured that this
improvement in competitiveness was not a passing trend.

Rebalancing of the economy raised other intellectual challenges for
monetary policy – should the long-term unemployed, as a result of the
shift of resources to more profitable sectors of the economy, become
less attached to the labour market. That would imply that they
would have less of an impact in terms of moderating inflation.

“Our economy will be able to grow less quickly, unemployment fall
by less, before we start to see inflation pressures rising”.

The MPC would have to keep a “vigilant” eye on structural
unemployment developments, Dale said.

–London newsroom: 4420 7862 7492; email: dthomas@marketnews.com

[TOPICS: M$$BE$,MT$$$$]