LONDON: Britain's economic recovery may be at risk if sterling strengthens much further, the Bank of England said on Thursday, in its first significant hint of concern about the British currency's recent rise.
The central bank's Monetary Policy Committee said the 2 percent appreciation in sterling over the previous month reflected a stronger economic outlook, but that greater strength could jeopardise British exports.
"Any further substantial appreciation of sterling would pose additional risks to the balance of demand growth and to the recovery," the MPC said in minutes of its Dec. 4-5 meeting. Sterling is near a five-year high against other currencies, and the central bank said that for Britain's "burgeoning" economic recovery to be sustainable, it needs to rely more on business investment and exports and less on consumer demand.
The nine-member MPC was unanimous in voting to keep interest rates on hold at 0.5 percent and to leave the central bank's 375 billion pound stock of bond purchases untouched.
The policymakers said stronger sterling, and government steps at the start of December to limit household energy bill rises, had improved the inflation outlook.
Inflation could hit its 2 percent target for the first time in over four years early in 2014, the minutes said, as smaller rises in utility bills could reduce inflation by 0.15 percentage points compared to previous forecasts.
Consumer price inflation was 2.2 percent when the MPC met, and has since fallen to 2.1 percent.
The MPC said the outlook for inflation, inflation expectations and financial stability gave no grounds for it to move away from the so-called forward guidance that it gave in August, when it committed to keep interest rates on hold until unemployment falls to 7 percent.
The central bank forecast at the time that it would take at least three years for unemployment to fall to this level from 7.8 percent at the time of the forecast. But unemployment has fallen faster than the BoE predicted, and was 7.6 percent in the three months to September, while inflation dropped to a four-year low of 2.1 percent last month.
Last month the BoE revised its forecast to show unemployment at 7 percent as soon as this time next year, if interest rates stay unchanged. Another scenario, based on market bets on interest rate rises, points to 7 percent unemployment in late 2015.
Britain's economy has strengthened since August, with 0.8 percent growth in the third quarter, and the BoE predicts expansion of 2.8 percent next year, above the long-run average. But output is still 2.5 percent below its pre-crisis peak, and Governor Mark Carney, in a question-and-answer session with lawmakers on Tuesday, stressed that a sustained recovery was at risk due to weakness in the euro zone.
Chief BoE economist Spencer Dale has also highlighted the barriers to business investment that come from the poor relations between some small businesses and banks since the financial crisis.
Policymakers said in the minutes that they remained puzzled that the improvement in growth had not brought a cyclical upturn in workers' productivity, which has been very weak in Britain since the financial crisis.
The BoE said data published so far may be "misleading" and that it was too early to judge whether the economy's supply capacity was failing to keep up with the increase in demand.
But if productivity does not pick up, it could potentially push up inflation, and force the BoE to raise interest rates sooner than it would like. Markets currently expect a first BoE rate rise in mid-2015, according to the BoE.
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