BoE's Barker warns of frequent rate changes from mid-term inflation profile

BoE's Barker warns of frequent rate changes from mid-term inflation profile

	Published : Tue, 20 Mar 2007 20:42 By : Agencies Print this Story

LONDON (AFX) - UK rate setter Kate Barker today warned that the uncertain medium term outlook for inflation may prompt frequent changes in interest rates.

'For inflation, while short-term uncertainty is mainly due to the domestic energy market, and may be resolved over the next few months, the medium-term uncertainty is more pervasive,' she told an audience of businessman in Durham.

'I suggest that this may prompt a change in observed behaviour towards more frequent interest rate changes,' she went on to add.

The main uncertainty over the profile for inflation is related to how far past energy price gains have fed into retail prices and what is driving producers' confidence that they will be able to lift prices, she said.

She was referring to business surveys from the likes of the Confederation of British Industry which note that producers see are confident about passing on price increases in order to boost profit margins.

Barker also said she will be paying particular attention to upcoming surveys on inflation expectations.

Still, she downplayed the latest forecast busting rise in inflation, saying that the near term outlook for prices may be are solved' over the coming months.

Her comments come even as the Bank of England's preferred measure of inflation prices, the annual CPI rate, shot up in February to its second highest since December 1995.

Rising energy bills pushed inflation higher over the past year but they are set to ease and will likely be reflected in lower inflation levels over the coming months. In fact, going by the BoE's latest forecast, released last month, the CPI annual rate of inflation will drop below the 2.0 pct target by year end.

In February it rose to 2.8 pct from 2.7 pct the previous month.

On growth, however, Barker was more upbeat, summing it up as a forecast of 'robust and rather stable growth.' She noted that the outlook for exports remains strong although the profile for household spending is less certain.

She noted that official retail sales data for January was surprisingly weak and that she would 'put some weight' on the figures.

Still, she said that: 'In the UK there are so far only tentative indications of weaker consumer spending, or of a softening housing market.'

She also warned that the heavy debt burden carried by UK households suggests that they may react negatively to interest rate hikes, making it important for rate setters to watch out for downward risks to consumer spending.

On wages, Barker noted that pay deals have remained subdued although it could not be taken for granted they they will stay that way.

As a rate setter on the nine-strong Monetary Policy Committee since 2001, Barker also said that the central bank acts in a pre-emptive manner.

'Policy is pre-emptive - looking to move early in the event of a threat to the target, implying that decisions will only reflect recent CPI outturns to the extent that these are judged to contain information about inflation further ahead,' she said.

For her part, Barker said she often finds herself balancing between overreacting to news against the fear of not responding robustly enough.

And, she advised caution when interpreting the effects of changes in asset prices.

'Some pieces of news can be treated in a gradualist way, for example sharp changes in asset prices, so that they do not have their full effect on the forecast unless they prove to be more than just noise in the markets,' she said.

The recent turbulence in stock markets should be seen from a wider perspective. While share price volatility has remained up to the end of last week, the main indices are little changed from the time when the BoE left interest rates unchanged earlier this month, she added.

Barker, herself an external member of the rate setting panel, also observed that external members of the MPC are more likely to vote for a change in interest than career central bankers and that rate changes have been more frequent during months when the BoE releases its forecasts.

newsdesk@afxnews.com

slm

The copying, republication or redistribution of AFX News Content, including by framing or similar means, is expressly prohibited without the prior written consent of AFX News.

AFX News and AFX Financial News Logo are registered trademarks of AFX News Limited