London (MNI) – The Bank of England’s Monetary Policy
Committee should only aim to steer inflation gently back to target in
the medium term, BOE Executive Director Markets Paul Fisher says
Tuesday.

Fisher says that with the UK economy having been hit by relative
price shocks the MPC can, in accordance with its mandate, accomodate the
rise in prices and take its time getting inflation back from its current
level, of 4.5%, back to the 2.0% goal.

Fisher has consistently voted to leave monetary policy at an
ultra-loose setting, voting to keep Bank Rate at its record low 0.5%.
The text of his speech, to the Euromoney Global Borrowers and Investors
Forum, suggests he will continue to oppose a near term rate hike.

“Given the nature and timing of the shocks, I would argue that the
best we can do with monetary policy is accept the initial impact and
then to gently steer inflation back to target in the medium term,”
Fisher said.

He spelled out the shocks that have hit the UK economy – the credit
crunch, the fall in sterling, the rise in indirect taxation and the
unexpected surge in commodities prices.

“The nature of the shocks that have hit the economy mean that there
is no easy path for monetary policy and the outlook for the economy is
especially uncertain. The main message I want to get across, is that
there is no magic solution to these challenges,” Fisher says.

“The MPC are trying to set the best path back to the inflation
target, but even the best path is an extremely uncomfortable one.”

He noted the projections in the BOE’s May Inflation Report which
show CPI, having risen to 4.5%, “is likely to rise further in the
near-term before beginning to fall back. Moreover, the rate of inflation
may well stay above target for the remainder of 2011 and 2012.”

Fisher says the MPC was surprised by the strength of commodity and
“originally underestimated the degree and timing of exchange rate pass
through into consumer prices.”

He said these real, relative prices shocks, including the latest
one, the rise in energy prices, while driving up inflation also push
down on output.

They are negative supply-side shocks and these make “policy-making
much more difficult – one can only counter the resulting inflation by
exacerbating the fall in output.”

He said the best monetary policy could do to deal with them was “to
allow the one-off price level effects of such shocks to flow through to
final prices but to make sure that there are no second-round effects,
such as compensating wage increases.”

He defended the MPC’s decision not to respond with tighter policy.

“We could have tightened policy to keep inflation at target when
the shocks first hit – but it would have needed to be a very material
tightening. I believe that would have engendered a worse outcome on all
counts. Bank Rate would have dampened inflation by adding even more
downwards pressure on demand on top of the existing recessionary
forces,” he said.

He said policy would have been tightened, but only “if nominal
wages start to rise in an attempt to offset that inevitable fall in
standards of living, risking a wage-price spiral.”

–London newsroom: 4420 7862 7491; email: ukeditorial@marketnews.com

[TOPICS: M$$BE$,MT$$$$]