Strong pound might not have lasting effect on inflation: BoE's Forbes

CARDIFF: The Bank of England might have to raise interest rates sooner than its models suggest if the strengthening of the pound proves to have a softer impact on inflation than currently thought, a top official at the central bank said.

Kristin Forbes, one of the nine members of the Bank's rate-setting committee, said sterling's appreciation had contributed to a fall in import prices which was one important factor behind inflation's fall to around zero in recent months.

But Forbes said in a speech on Friday that past experience and some of the basic assumptions about the influence of the exchange rate on inflation did not do a good job at explaining what was going on in Britain at the moment.

More emphasis was needed on the underlying reasons for moves in a currency which could have different outcomes on inflation.

"Perhaps most important for monetary policy today, this approach also suggests that sterling's recent appreciation could create less drag on import prices and inflation than we might have expected if the levels of pass-through seen after the crisis persisted," Forbes said.

"If this plays out, monetary policy would need to be tightened sooner than based on older models."

The BoE cut interest rates to a record low of 0.5 percent in 2009 and has kept them there ever since, despite a strong recovery in the economy over the past two years.

BoE Governor Mark Carney has said the time for a rate hike is approaching and a decision is likely to become clearer around the turn of the year.

The role of sterling -- which has appreciated by 17 percent against a range of other currencies since the spring of 2013 -- is central to the BoE's thinking.

Forbes said the rise in the currency was mentioned 11 times in the minutes of the Monetary Policy Committee's August policy meeting.

"How sterling's most recent appreciation, and any future currency movements, affect prices will be a critically important determinant of when is the appropriate time to begin raising interest rates," she said.

Forbes has so far voted to keep rates on hold since she joined the Bank last year but economists say that in the coming months she may join the sole member of the MPC currently backing an increase, Ian McCafferty.