–Cites Risk Of Higher Comms Prices, Especially Oil
–But Inflation Risk Needs To Be Balanced Vs Downside Growth Risks
–GDP Q4 Drop Could Be A ‘Soft Patch’ But Could Be More Durable Slowdown
–Libya Impact On Oil Price Manageable, Danger If Saudi Supply Impacted

LONDON (MNI) – High inflation may prove more persistent next year
than the recent Inflation Report projections from the Bank of England
suggest, Deputy Governor of the Bank of England Charles Bean says today.

But Bean also warns that the UK recovery faces ‘significant
headwinds’ and is looking ‘fragile’.

“…There is the risk of further increases in the prices of
commodities, especially that of oil. Certainly, my own judgment is that,
if anything, inflation may prove a little more persistent next year than
presently embodied in our projections,” Bean said in a speech to the
Association of British Insurers.

But, Bean adds that this risk needs to be balanced against downside
growth risks and the prospect of a persistent margin of spare capacity.

“Allowing inflation to come back gradually towards the target would
allow the margin of spare capacity to close more rapidly, and would be
in line with our remit that tells us that temporary deviations of
inflation from the target are permissible if they help to avoid
excessive volatility in output”.

Among the headwinds, Bean cites credit conditions, fiscal
conmsolidation and depressed consumer and business spending.

The UK banking system faces still high funding costs and will have
to replace stg400 billion of wholesale funding over the next two years.

“…Conditions in the banking sector are likely to continue to act
as a brake on the recovery,” he says.

Fiscal consolidation will also weigh on growth in coming years and
a worsening of the euro zone sovereign debt crisis could also “hold back
the recovery,” Bean says, if it impacts on the banking system, Bean
reiterates.

The 25% fall in sterling since the start of the crisis should help
to boost the contribution of net exports to growth and indications that
this is starting to bear fruit are evident in strong data from the
manufacturing sector, Bean says.

Bean also expresses concern that the shock 0.6% fall in output seen
in Q4 is more than a weather-related blip and notes that business and
consumer confidence also weakened in the second half of last year,
hinting that something more substantial occurred, he says:

“It could just be a short-lived soft patch – after all, recoveries
are rarely smooth. Indeed, that is the judgement incorporated in the
projections we published a couple of weeks ago. But it could instead be
the harbinger of a more durable slowing – only time will tell”.

While Bean believes that the strife in Libya can be managed in
terms of its impact on oil prices going forward – OPEC oil stocks are at
a historical high level – but should Saudi Arabian supply be disrupted
by the current upheavals in the MENA region – “then that could
potentially lead to very sharp upward pressure on oil prices”.

Bean also notes that the pass-through from the fall in sterling
into consumer prices has been ‘rather larger’ than the BOE MPC had
expected and larger also than recent economic experience would indicate.

On the risk of persistently high inflation leading to higher
inflation expectations and higher wages and prices, Bean notes that
inflation expectations have moved up, but that longer-term inflation
expectations remain ‘well anchored’.

“But this is something we are watching closely, in particular for
any signs that higher inflation expectations are leading businesses to
raise pay and prices”.

–London newsroom: 00 44 20 7 862 7499; email: ukeditorial@marketnews.com

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