LONDON: If the Bank of England ceases to be viewed as a credible inflation fighter, it will no longer be able to support the economy through its monetary policy, BoE Deputy Governor Paul Tucker said on Tuesday.
The BoE restarted its asset buying programme last month to support growth, despite persistently above-target inflation, on the basis that price growth is forecast to fall sharply at the start of next year as one-off shocks fade.
In a speech to London financiers, Tucker said the BoE's judgment that it had been appropriate to allow inflation to exceed 2 percent for longer than usual would soon be put in the spotlight.
"An absolute precondition for maintaining our support to demand is the credibility of monetary policy.
Over the next few quarters, the Committee's most important judgment call will be put to the test. We will all discover whether inflation declines rapidly from 5 percent towards 3 percent," he said.
Most economists polled by Reuters expect the BoE to approve further quantitative easing in February, when it will have completed the 75 billion pounds of gilt purchases it decided on in October. However, if inflation proves sticky that may be the last stimulus move, even if growth remains weak.
"Mr Tucker's speech highlights what is, in our view, the main risk associated with the UK's current monetary policy stance," said Barclays Capital economist Chris Crowe.
"The MPC has staked its credibility on its forecast that the degree of spare capacity in the economy would rapidly bring inflation back to target. If inflation proves stickier than the MPC expects, an extension of QE beyond the additional 75 billion pounds that we expect in February 2012 seems unlikely."
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