Bank of England says downside inflation news offset by pound

Most of the news since August has been on the downside for both the growth and inflation outlook but this has to be offset against the fall in the pound, Bank of England policymaker Paul Tucker said yesterday.

Inflation expectations were also flashing warning signs, he said in a speech to academics, and the Monetary Policy Committee had to ensure that an expected spike in inflation was a temporary state of affairs.

Mr Tucker said that since the bank's August Inflation Report, the eurozone economy had got weaker, the US housing market was still slumping and output and labour market data in Britain had been on the soft side.

And food and energy prices had continued to fall, perhaps reflecting the effects on global demand of higher cost in the past.

"On balance, these developments mostly comprise downside news since the August Inflation Report, to the outlook for demand and for inflation. But the recent depreciation of the exchange rate has to offset against that," Mr Tucker said.

"And headline inflation has reached 4.4 per cent. It will probably rise further. The Committee can and will ensure that this is a temporary state of affairs. But for the moment, inflation expectations do continue to flash an amber light."

The Bank held interest rates at five per cent for the fifth month running last week and analysts are divided over when the central bank might resume cutting rates to revive a stuttering economy and Mr Tucker's comments will not settle the debate.

"Paul Tucker's comments hint that he could be edging towards favouring an interest rate cut," said Howard Archer, economist at Global Insight.

"Nevertheless, Mr Tucker stresses the importance of anchoring inflation expectations if medium-term price stability is to be achieved."

Mr Tucker also suggested markets may have misinterpreted the bank's inflation report as paving the way for rate cuts because its modal forecast for inflation was just below two per cent in two years' time.