Bank's Dale sees inflation risks

By David Clarke

LONDON (Reuters) - The new Bank of England chief economist, Spencer Dale, struck a balanced note on Wednesday, saying there were substantial opposing risks to the inflation outlook complicating life for policymakers.

In written answers to parliament's Treasury Committee, Dale, who started his new job at the start of the month, said the Monetary Policy Committee was facing the toughest economic environment since it was set up in 1997.

"I expect the pass-through from the recent increases in food and energy prices to cause CPI inflation to move substantially higher over the course of this year, before gradually falling back to around the target as these relative price effects dissipate and the economy slows," said Dale.

"But there are considerable uncertainties surrounding this profile."

The Bank left interest rates at 5 percent last week at Dale's first policy meeting.

It is under pressure to cut them again because house prices are sliding and economic growth is faltering. But inflation hit a series high of 3.8 percent in June, nearly double the central bank's target and most economists expect the central bank will leave borrowing costs unchanged for a while yet.

"There is a possibility that food and energy prices may continue to increase rapidly and cause CPI inflation to persist above the Committee's inflation target," Dale wrote.

"This upside risk to inflation is compounded by the possibility that a sustained period of above-target inflation may become embedded in wage and pricing decisions and so increase the persistence of the inflationary shock."