–Adds Detail, Quotes From Later CNBC Interview In 2nd Half Of Story
–Posen: Would Be More Worried About Inflation Without Euro Area Woes
–Posen: Euro Area Downturn Will Certainly Have Negative Impact On UK
–Posen: Slack In UK Econ. Not Pushing Down On Inflation As Expected

LONDON (MNI) – Upside UK inflation risks have increased and
inflation would be even more worrying if it was not for the downturn in
euro area growth prospects, Bank of England Monetary Policy Committee
Adam Posen said in a Bloomberg interview.

Asked about the UK’s surprisingly high inflation outturns, Posen
said he and his colleagues on the MPC had acknowledged upside inflation
risks have risen but they were not predicting an “inflationary storm”.

“I don’t think we should be girding for an inflationary storm,”
Posen said.

“I and other members of the committee said pretty clearly in the
(May) minutes that were released this week, and in the forecast, that we
view that there are increased upside risks to inflation,” he added.

The turmoil in the euro area is easing the pressure on UK
inflation, however.

“Had there not been this breakdown in the euro area growth
prospects … I would be more worried,” Posen said.

The downturn in the euro area’s growth outlook is “certainly going
to have some disinflationary, some negative drag, on the UK economy,” he
added.

Posen expressed concern that core UK inflation has not fallen.

“We have to recognize though that we have a (2.0% inflation)
target. So far we have been overshooting the target and it is a little
disturbing that when other countries’ core inflation rates are
descending ours is not,” Posen said.

“I would rather have this problem than being in deflation, so I
don’t think we are wholly wrong, but the basic expectations we are
seeing on the gilt yields, in surveys of financial markets and
households, suggest that inflation expectations are still anchored,” he
added.

Nevertheless “we can’t just say it is only about the downside –
there is an upside (inflation risk),” Posen said.

Posen On CNBC: Resilient UK Inflation Keeping MPC Awake At Night

In a subsequent interview on CNBC, Posen highlighted the downward
impact from the euro area turmoil and said the stickiness of UK
inflation was keeping MPC members awake at night.

Asked about the likely impact he said: “It certainly isn’t going to
be good. We can assure ourselves of that.”

He noted that over 50% of British trade is with the euro area and
that one of the major UK banks is owned by a euro area bank in an
affected area – presumably Spain’s Santander.

“The euro currency’s decline vis-a-vis the pound that helps us on
inflation (but) has some (hits) competitiveness, so it is not good,”
Posen said.

Posen said the euro weakness “isn’t the end of the euro area. It is
a signal about slow growth in the euro area which is sad, but is not
disaster yet.”

Asked why UK inflation is so much higher than elsewhere in the
developed world, Posen said this was the main question which troubled
MPC members.

“It is the main question which keeps me and my colleagues on the
MPC up at night,” Posen said.

“That is why in our last set of forecasts which just came out, and
in our minutes of the last MPC meeting, we stressed the fact that there
are upside risks because it seems like the slack we have in the economy
isn’t pushing down on inflation the way we would expect,” he said.

“Clearly the previous decline in the pound has something to do with
it. Clearly the movements in VAT having something to do with it, but
clearly that doesn’t explain it,” Posen said.

“Core inflation is higher in the UK and it is not dragging down the
way it is in the euro (area) and the US,” he said.

He added that he would rather have the problem of having inflation
temporarily a percentage point or so above target rather than having
deflation and reiterated inflation expectations are anchored.

Nevertheless, he said the BOE had to “pay more attention to this”
above target inflation and “there is no obvious answer.”

Asked about the relevance of the current high inflation outturns
for monetary policy Posen refused to be drawn on when the MPC might
decide to tighten policy.

He said what matters is why inflation is elevated and he said there
were good reasons to expect it will come down.

“If we are looking at a couple of months where again we get some
energy spikes, or something, we have to take that into account,” he
said.

Posen said public sector wage constraint should be a key factor
keeping inflation in check.

“We know that public sector wages are going to be constrained …
that is a huge part of the field on inflation and that is going to eat
away and you have got to expect inflation is going to come down,” he
said.

Nevertheless, the MPC will know it has an inflation problem if it
stays elevated without any further external cost shocks.

“If we don’t have a clear, obvious shock that tells us why
inflation is going up then we know we have got a problem with the
functioning and the expectations and we have to do something about it,”
he said.

Posen downplayed the likely impact of looming fiscal squeeze on
the BOE’s inflation and growth forecasts, as the central bank moved to
factor this in in advance by boosting its savings projections.

“We did build into our forecast a very high level of total national
savings. Obviously there is some question as to how much of that is in
household and corporates versus the public sector,” Posen said.

“That total national savings was several percent of GDP,” he said.

As the MPC does not expect household savings to go up very much in
the near future “that implies … a pretty big fiscal consolidation in
the UK,” he said.

He said the government was “in the right ballpark” making deficit
reduction a priority.

The new UK coalition government is widely expected to unveil a hike
in value added tax to support deficit reduction. But Posen said “in
theory” the MPC would look through the impact of this on inflation.

“In general, economists believe taxes on consumption are pretty
efficient,” he said.

On the rally in house prices, Posen said it was party helping to
reflate the economy but UK households have learned not to boost spending
in response to paper gains in house prices.

–London newsroom: 4420 7 862 7491; email:
dthomas@marketnews.com/drobinson@marketnews.com

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