LONDON Britons' living standards are likely to fall further, and there is little the Bank of England can do about it, the central bank's chief economist warned on Wednesday.
Spencer Dale said Britain's economy still had further to go to adjust to the aftermath of the financial crisis, and that a mix of slow wage growth and stubborn inflation is likely while that happens.
"Monetary policy has only a limited role to play as an economy adjusts to these types of real shocks," he said in a speech to economists in London.
"The (BoE) can try to pick the least costly route, but ultimately it can't avoid the journey being long and painful," he said at the event, hosted by MNI Deutsche Boerse.
The BoE stopped buying more government bonds to stimulate Britain's economy last month, and economists polled by Reuters are fairly evenly divided on whether it will ever resume them.
Dale's remarks come after a mixed set of labour market data earlier on Thursday. This showed a record number of Britons in work, but a rate of unemployment that is still high at 7.8 percent, and wage growth slowing to 1.7 percent - well below inflation at 2.7 percent.
Britain has recovered much more slowly than most other big economies since the financial crisis, and government forecasts suggest it will tip back into contraction during the current quarter, just three months after it came out of recession.
But Dale said the amount of slack in Britain's economy was not a reliable guide to inflation pressures.
British inflation has been above its 2 percent target since December 2009, and the BoE does not forecast it will fall below target until the second half of 2014.
"The stickiness of inflation is a by-product of the real adjustment that our economy has been forced to make," Dale said.
"Looking ahead, it seems likely that this adjustment process is not yet complete and so the stickiness in inflation may persist for a while yet."
GILT COUPON CONCERNS
Dale's comments about the limits of monetary policy echo closely those given by Governor Mervyn King in a speech in New York on Monday, but he struck a different note on another issue to have hit the central bank in recent weeks.
Shortly before November's policy decision, the government told the BoE it would take back gilt coupons paid to the central bank as a result of its previous 375 billion pounds of asset purchases - something roughly equivalent to 35 billion pounds of new asset purchases.
King brushed aside public concerns about the deal being a threat to the BoE's independence, but Dale was more sympathetic to this view, even if the transaction had not affected his decision to oppose an increase in asset purchases in November.
"The flows of money between the Bank and Her Majesty's Treasury that are likely to result from this decision are large, very large," Dale said. "We should have our eyes open that large financial flows between the fiscal and monetary authorities may raise understandable concerns."
Particular problems may come at a time when the BoE wants to raise interest rates, which would both increase government borrowing costs and require the government to pay money to the BoE under the terms of the complex deal, Dale added.
(Reporting by David Milliken and Olesya Dmitracova; Editing by Catherine Evans)