BoE's Blanchflower sees UK inflation falling 'well below' target by year-end

BoE's Blanchflower sees UK inflation falling 'well below' target by year-end

	Published : Mon, 26 Feb 2007 18:47 By : Agencies Print this Story

STIRLING, Scotland (AFX) - Inflation in the UK is likely to fall back towards target by the middle of 2007 and well below it by the end of the year, the leading dove on the Bank of England's rate-setting body said today.

David Blanchflower, who is the only rate-setter on the Monetary Policy Committee to have voted against all three quarter point interest rate hikes since last August, told an audience at the University of Stirling that base effects and the recently announced cuts in gas and electricity prices are expected to push CPI inflation back to the 2.0 pct target by late spring/early summer.

CPI inflation spiked up to a 12-year high of 3.0 pct in the year to December, which prompted the MPC's surprise rate hike in January. If it had risen to 3.1 pct, the BoE's governor Mervyn King would have had to write a letter to Chancellor of the Exchequer Gordon Brown explaining why it had deviated by more than one percentage point from the target.

Blanchflower said he is surprised that the governor at the time has not had to write a letter in the 10-year history of the MPC.

'It doesn't look like we will have to for a while either as inflation is now falling steadily and likely to be back around, and probably well below target, by the end of the year,' Blanchflower said.

Blanchflower added that he expects inflation to recede 'more quickly and to a greater extent' than the profile in the most recent BoE Inflation Report.

In the February Inflation Report, the BoE said it expects inflation to drop below 2 pct over the next 12 months before settling at that level over the medium term if one more rate rise materialises, as the market predicts.

Other members on the MPC think that pricing pressures may prove stronger than the BoE's central projection as a result of strong demand and high asset prices.

Blanchflower bases much of his thinking on his view that the labour market has loosened over the past twelve months or so because of such factors as an increase in net migration, higher participation rates among the elderly, rises in youth and long-term unemployment, more flexible work patterns, a decline in union membership and less centralised bargaining.

As a result, he said there has been 'no evidence' of any pick-up in earnings growth. Wage pressures, he added, are likely to remain 'benign'.

Blanchflower also thinks that the so-called output gap -- the gap between potential and actual output -- continues to increase in size, suggesting that the potential for the economy to grow in a non-inflationary way is substantial.

He also reckons that the UK's monetary policy framework has worked well to keep inflation expectations in check despite the sharp rise in energy costs over the last couple of years. Recent indicators suggest that inflation expectations have fallen back after a brief spike up in early 2006, he added.

Elsewhere, Blanchflower defended himself from accusations that his continued residence in the US is detrimental to his position on the rate-setting panel.

He said he spends well over half his working month in the UK and noted that the four external members on the MPC are meant to be drawn from a variety of perspectives and backgrounds.

'That is one of the strengths of the committee,' he said.

'There is certainly no need for membership to be restricted to those that live in the Home Counties,' he added.

pan.pylas@thomson.com

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