Bean's 'slowdown' warning muddies rate hike talk

Bank of England deputy governor Charlie Bean has defended MPC policy in the face of persistently high inflation, warning the economy could be on the verge of a “durable slowing”.

His comments would seem to dimiss the likelihood of an early interest rate rise.

Bean said CPI inflation will increase beyond its current level of 4%, which is already twice the MPC's target. 

But the MPC must balance the risks posed by high inflation against economic headwinds which threaten to derail the recovery, he told the ABI's conference in central London yesterday.

"We assumed the weakness in the Q4 GDP figures will be a temporary soft-patch, but it could be the harbinger of a more durable slowing. Only time will tell," he said.

The 0.6% contraction in GDP in the last quarter of 2010 pointed to a possible slowing down of the economy which could exert downward pressure on inflation, he said.

He blamed the above-average inflation figure on global price pressures, a near 25% depreciation in the sterling exchange rate and January's increase in VAT to 20%.

CPI will "likely be" higher in the near future due to soaring commodity and oil prices, he said.

A year ago the MPC estimated CPI would be around 1% today. Bean said current MPC projections estimate inflation will start to fall in 2012.

Bean said the financial crisis which exploded in 2008 had created a peculiar set of circumstances.

Referring to depressed levels of spending within the housing and business sectors, he said: "It takes time for confidence and spending to recover after such a shock."

"The risk of inflation remaining above target has to be weighed against the downside risk to growth."

He defended the MPC's decision to hold the base rate at a historical low of 0.5% for the last two years, and said a loose and flexible monetary policy was needed to absorb economic shocks and reduce volatility.

The committee's last meeting resulted in a four-way split, with Andrew Sentance voting for a 0.5% hike in the base rate, and Spencer Dale and Martin Weale calling for a 0.25% rise.

"Given the extreme nature of events it would be surprising if the committee all agreed - but we are united in restoring the economy to high levels of activity," said Bean.

He remained tight-lipped about how he will vote in the next meeting.

"It depends on how I and my colleagues read the data coming in - it's the data that drives the decision."