Crude price 'shock' is next threat to recovery

Volatile energy costs could prompt next crisis, says Bank of England policymaker

Soaring energy prices could fuel inflation and derail economic recovery, one of the Bank of England's most senior policymakers warned yesterday.

"We need to be looking carefully to see where the next big global shock might be coming from," Andrew Sentance, who sits on the Bank's Monetary Policy Committee, told a London conference. "And the energy market is one of the prime candidates we need to keep an eye on."

Even by its own standards, the oil price has had a highly volatile recession. From an unprecedented $147 (£90) per barrel high in July 2008, it fell to $30 by the end of the year, before doubling to $60 by May and fluctuating around the $70 mark since.

Burgeoning recovery – particularly in energy intensive emerging economies – could cause another oil spike, boosting both business costs and consumer price inflation and dampening nascent growth. "One important issue is the impact that recovery will have on the level of energy prices and whether the heightened volatility we have seen in recent years will persist," Mr Sentance said.

The effect of commodity prices on inflation is particularly marked. Stripping out food and energy – which are closely allied to global prices – UK CPI would have held near the 2 per cent target in recent years, rather than riding a "rollercoaster" which took it over 5 per cent last year and back down below the target this year, Mr Sentance said.

The oil price is already unusually high, despite the sharp falls since last year. "It is very striking that even with the high degree of spare capacity in the economy at present, oil is trading at $70 per barrel," Mr Sentance said.

There were similar warnings from the oil industry itself yesterday. Christophe de Margerie, chief executive of the French energy giant Total, said oil is set to move back above $100 and warned that if recession-hit oil producers continue to delay investment the world faces shortages by 2015.

Mr Sentance's warning also echoes remarks from the Bank Governor, Mervyn King, last week. He described commodity prices as one of the "headwinds" facing the economy, not least because of recent growth in Asia. "Because their growth is more energy-intensive than in other parts of the world so we may see a pick-up in commodity prices," Mr King said. "[So] recovery may be more protracted than we might otherwise have thought."

The warnings came as the pound hit a five-month low against the euro after the Bank published a report questioning the effect of the financial crisis on foreign investors' willingness to buy sterling assets. "The long-run sustainable real sterling exchange rate may have fallen," the Quarterly Bulletin said.

The report blamed sterling's slump in response to the financial crisis – the biggest since the 1970s – on worries about the economy's reliance on an over-mighty financial sector and on concerns over government debt. The pound fell as low as €1.1016 against the euro and to $1.6134 against the dollar.