No let-up in inflation next year, Bank warns

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The Independent Online

Charlie Bean, the deputy governor of the Bank of England, has admitted that inflation is "uncomfortably" above the official target of 2 per cent – and compared the sovereign debt crises enveloping the eurozone with the collapse of Lehman Brothers in 2008, an event that led to a global collapse in market confidence.

The Office for National Statistics reported yesterday that input prices rose by 0.9 per cent in November, double the expected figure. Annual inflation ticked up from 8.2 per cent to 9 per cent, thanks to crude oil and fuels.

Highlighting the policy dilemmas the Monetary Policy Committee face, Mr Bean stressed that, despite continuing inflationary pressures, "it may be some while yet before normality is restored". He added that there were "somewhat comforting" signals for the future, amid much uncertainty. The bank has forecast that output at pre-recession levels will not be seen before 2012. Nor will inflation return to target until then.

Peering across the English Channel, Mr Bean seemed to offer some support to the notion that the eurozone should not break up and its "struggling" states thereby devalue their currency. "While the countries of the euro-area periphery are each confronted by specific challenges, they all need to restore their competitiveness without the option of devaluation," he said.

"They face the prospect of sustained low growth in order to drive down wages and prices."

More countries may follow Greece and Ireland, Mr Bean hinted."Financial support for other countries may or may not prove necessary – only time will tell," he warned. "But the important thing for us is whether an intensification of the difficulties in the euro-area periphery could also derail the recovery here."

The Treasury Select Committee and others have raised the question of the UK having a contingency plan in case of a euro failure, not leastbecause of its effects on Britishfinancial stability.

Mr Bean suggested the Bank of England may be alive to the risks. "There is the possibility of further indirect effects arising through the interconnectedness and cross-border operations of European banks which could amplify the impact," he said. "So some adverse effect on the funding costs of UK banks and the supply of credit remains a possibility. Harder to gauge is the potential effect on household and, especially, business confidence."

"In the aftermath of the collapse of Lehman Brothers, this was arguably the most significant transmission channel to the real economy. An intensification of the sovereign debt problems in the euro area could administer a blow to the recovery.

"But given the very high degree of uncertainty, there is little that the MPC can do to deal with this risk ahead of crystallisation".

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