BoE's McCafferty hopeful for modest UK pickup

LONDON, April 23 Tue Apr 23, 2013 7:00am EDT

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LONDON, April 23 (Reuters) - The outlook for Britain's economy is picking up and while inflation remains a concern, the Bank of England is right to take a flexible approach to containing price growth, a top policymaker said on Tuesday.

"On balance, I think the outlook is now looking more encouraging than for some time," said Ian McCafferty, a member of the Bank of England's Monetary Policy Committee (MPC).

In a speech to be delivered in Coventry, central England, he cited improving credit conditions, an expected gradual recovery in investment by businesses and encouraging signs from the economies of United States and China.

"Of course, there remain substantial risks that may still knock us off course, not least from the challenges facing the euro area, and if required, the MPC stands ready to respond," McCafferty said.

Britain's economy is expected to grow just 0.6 percent this year, according to the government's budget watchdog, despite the Bank of England holding interest rates at a record low for four years and spending 375 billion pounds on government bonds in an attempt to get growth going again.

McCafferty said that while the risks of higher inflation were more concerning, it was appropriate for the Bank of England to tolerate above-target price growth over the next two years.

As long as the weaker pound helped boost exports or reflected diminished fears among investors about riskier parts of the world, "it would not be sensible to prevent the real adjustment by tightening monetary policy".

However, should the decline in the pound reflect concerns about the Bank of England's anti-inflation credibility, "then I strongly believe that the case for accommodation is much weaker," McCafferty said.

"So far, there is little evidence that inflation expectations have become de-anchored, while domestic inflationary pressures, in particular wage growth, remain very subdued," he added.

McCafferty has voted against further bond-buying by the central bank so far this year, along with the majority of the MPC. In his speech on Tuesday, he limited his comments on the programme to a defence of its effectiveness to date.

McCafferty also reiterated a view shared by other policymakers that the impact of the Funding for Lending Scheme, which seeks to encourage banks to lend by reducing their funding costs was "likely to be more marked in coming months".

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