Slow loss of credibility could lift inflation - Bank's Dale

LONDON Thu Mar 24, 2011 10:03am GMT

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LONDON (Reuters) - The Bank of England is at risk of gradually losing public confidence due to persistently above-target inflation, posing an upward risk to future prices, the central bank's chief economist, Spencer Dale, said on Thursday.

Dale -- who voted for higher interest rates this month and last -- broadly defended the Bank's past policy decisions in a speech to asset managers, but said it was now time to tighten what he described as "extraordinarily loose" monetary policy.

Unlike some of his colleagues on the nine-strong Monetary Policy Committee, Dale said he was wary about the apparent stability of public medium- and long-term inflation expectations in surveys.

"I'm cautious about how much comfort we can take from the relative stability in these measures," he said.

"Although some economists may like to think otherwise, most companies and households have far better things to do than spend time formulating detailed expectations of the rate of inflation likely to prevail in 5 or 10 years time."

Dale said the bank's credibility could dissipate slowly over time, posing a major upside risk to the Bank's current forecasts of inflation falling back to target.

Specifically, the risk was that the public would think the Bank was prepared to tolerate very lengthy periods of above target inflation, rather than take rapid action to bring prices back to target, Dale said.

"This risk is almost impossible to monitor ... but it could have profound implications for the inflation outlook and the performance of our economy," he said in the speech in London.

The other major risk to CPI seen by Dale was from global price pressures, due either to commodity price rises or overheating in emerging economies.

Dale was in a minority of three on the Bank's Monetary Policy Committee earlier this month in voting for an increase in interest rates, as he had been in February.

Policymakers had to balance the risk of a weak recovery in the British economy versus the dangers of above forecast inflation, he said.

In his view, economic growth that was likely to be around average this year, combined with inflation more than double its 2 percent target and loose monetary policy were sufficient reasons to raise rates, he added.

Dale also said that he would not necessarily have made exactly the same past decisions on interest rates if he had known how inflation would develop, but would probably not have tightened policy significantly more.

(Editing by Toby Chopra)

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