The Bank of England will cushion only part of the shock to demand from current credit market turmoil and remains focused on hitting its inflation target, policymaker Paul Tucker said in remarks published on Friday. In comments made in an April speech, Tucker also warned Britain faced further turbulence in coming months, as tightening credit conditions could get "worse rather than better".
"The (Monetary Policy Committee's) strategy to date has been clear: to offset part but not all of the shock to demand, consistent with an overriding determination to maintain medium-term inflation expectations anchored to the 2 percent target," Tucker, the BoE's executive director for markets, said. "The path of rates will depend on judgements about the balance of those risks to the inflation outlook."
Tucker's comments were made in a speech in London on April 29, but were only released by the Bank of England on Friday. The Bank is struggling with an increasingly difficult dilemma, as it weighs up Britain's slowing economy against rising inflation, stoked by food and fuel prices. Tucker, however, indicated he was in no rush to change current policy.
Current conditions, Tucker said, were testing the idea that authorities can simply slash rates to deal with systemic stress. There would be no "mopping up" strategy of cutting rates to offset slower demand without regard for inflation, he said.
But he warned of a "nasty shock" to costs from rising commodity prices and the weaker sterling. "That is going to push up UK inflation over the next few months, creating a risk of upward pressure on pay and higher inflation expectations," he said.
Markets have moved aggressively to price in higher borrowing costs over the coming year, despite the prospect of weaker economic growth, as central bankers around the world contend with soaring fuel and food prices. Economists, however, argue the most likely direction for rates will be down, to stave off the risk of recession.
The last reading for UK consumer price inflation was 3 percent in April, above the BoE's target, and the Bank has forecast it could spike to around 4 percent. Britons' expectations of future inflation surged to a record high of 4.3 percent in May, over a point above actual rates.