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BoE's McCafferty flags higher inflation expectations
June 14, 2013 / 9:56 AM / 5 years ago

BoE's McCafferty flags higher inflation expectations

LONDON (Reuters) - Some measures of British inflation expectations suggest doubts are creeping in about the Bank of England’s commitment to keeping a lid on price growth, a top policymaker said on Friday.

The Bank of England is seen behind holly bushes in the City of London March 15, 2013. REUTERS/Suzanne Plunkett

Ian McCafferty, one of nine members of the bank’s rate-setting committee, said it was “certainly not the case” that the Bank was more tolerant of inflation.

“In this environment, I believe it is important to continue to be mindful of the need to keep expectations well-anchored when setting policy,” McCafferty said in a speech to be delivered in London.

The Bank of England’s primary target is for inflation of 2 percent although it has been above that level for most of the past five years, pushed up by energy costs, higher university fees and a weaker pound.

Chancellor George Osborne in March gave the bank a reworded remit which kept the inflation target but gave it more explicit guidance to tolerate above-target price growth in order to get the economy growing.

The bank’s next governor, Mark Carney, has stressed the merits of flexible inflation targeting. He has also suggested he will seek to give some kind of longer-term commitment to keeping interest rates low, a change some Bank policymakers have said could limit their options to respond to changes in the economy.

In his speech, McCafferty said Bank research, published in a quarterly bulletin this week, showed that since May last year, market-derived forward inflation rates for between two and 10 years out have moved more in response to inflation news than they did over the period from 2004 to 2007.

“That greater sensitivity to short-term inflation news could suggest that expectations are becoming less anchored than they have been, and that markets perceive that the MPC has become more tolerant of inflation,” he said.

“This is certainly not the case, though it would be easy to see why some might think so, given the recent history - inflation having overshot the target for the past three years and not expected to return to target for much of the next two.”

Editing by Catherine Evans

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