Don't overreact to UK inflation - Bank's Posen

BILLERICAY, England (Reuters) - Bank of England Monetary Policy Committee member Adam Posen said on Thursday that policymakers should not overreact to inflation which remains above target.

Posen has been alone on the Bank of England’s monetary policy committee in calling for more quantitative easing to prevent the economy from plunging back into recession.

Data released on Tuesday showed inflation had hit a six-month high of 3.3 percent, remaining well above the two percent target and denting hopes of further QE.

However, Posen said he forecast inflation would be well below forecast in two year’s time.

“The first point I want to make is that neither our forecast nor our policy going forward should overreact reflexively to that above target inflation, even though it will persist for the next few months after the coming VAT rise,” Posen said in a speech to a business breakfast.

VAT sales tax will rise to 20 percent from 17.5 percent in January, putting further upward pressure on inflation, but Posen said that should not alter policy.

“In particular, the MPC should not tighten in response to the inherently temporary effects on measured CPI inflation of a VAT increase,” he added.

In a speech underlining his differences with MPC hawk Andrew Sentance, Posen said that UK economy had a large output gap to close, pushing down on inflation.

He said household consumption was likely to decline in response to government belt-tightening, and that unit labour costs were declining, also bearing down on inflation.

Editing by Patrick Graham