Bean: BoE may be forced to act on rates -paper

LONDON Wed Feb 2, 2011 3:05am EST

LONDON Feb 2 (Reuters) - The Bank of England may be forced to act on interest rates if commodity prices continue to rise and inflation becomes embedded, the central bank's Deputy Governor Charles Bean said on Wednesday.

The bank still expects that, in the absence of further economic shocks, inflation will fall back towards its target level, he was quoted as saying in the regional Western Mail newspaper.

But commodity price pressures could remain high in the medium term, he said.

Bean suggested a rate rise need not dent confidence if it coincided with an economic recovery, but would not be "nice" if it was in response to external factors.

"If we raise rates because the economy is growing quite strongly and the recovery is entrenched then that's a 'nice' rise in interest rates and unemployment will be coming down," he was quoted as saying.

"On the other hand, if it is in response to a spike in oil prices that we think is likely to persist and inflation is becoming embedded that is not a nice reason to raise interest rates, but we would have to do it."

The price of Brent oil has breached the key $100 a barrel figure.

Britain is trying to balance the needs of keeping a lid on inflation while not wanting to stifle growth as the economy emerges from one of the deepest recessions in generations.

Inflation hit an eight-month high of 3.7 percent in December and was at least a percentage point above the bank's 2 percent target throughout 2010, causing some economists to question the central bank's inflation-fighting credentials.

Bean voted for no change to policy at the bank's last Monetary Policy Committee in mid-January.

(Writing by Avril Ormsby and Fiona Shaikh; Editing by John Stonestreet)

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