The Bank of England should be careful not to tighten monetary policy too soon as inflation is likely to fall and the risk of deflation has not disappeared, policymaker Paul Fisher said in remarks published on Tuesday.
Fisher said it was "unlikely that substantial inflationary pressure would be generated as the result of the recovery in demand" and reiterated the conclusions of the BoE's May Inflation Report which said a recent inflation spike would pass.
"We need to be sensitive to the risk of tightening policy prematurely, stifling the nascent recovery," Fisher said in remarks made in a speech on June 14 in Liverpool and only published by the Bank on Tuesday. "The risk of deflation … may have faded, but it hasn't gone away."
"It was sensible not to try and offset the recent rise in inflation by tightening policy," he added.
The BoE has slashed interest rates to a record low of 0.5 percent and spent 200 billion pounds of newly-created money on assets to help Britain pull out of an 18-month recession.
This month, the BoE froze policy but speculation has been rife over when the central bank will start to tighten policy and inflation hawk Andrew Sentance voted for a rate hike at the June rate-setting meeting — the first such vote since August 2008.
Inflation eased in May to 3.4 percent from 3.7 percent in April, still well above the BoE's two percent target but suggesting that price pressures are starting to ease.
Sentance told Reuters in an exclusive interview on Monday that a weak pound had not helped the inflation profile. [ID:nLDE65R20F]
Fisher, who said a 25 percent decline in the value of sterling since August 2007 reflected a revaluation of the UK economy following the financial crisis, argued that sterling weakness should only have a temporary impact on inflation.
However, Monetary Policy Committee member Fisher also said there was also a risk that higher price pressures could be sustained into the medium term, indicating that the central bank would then act to tame inflation.
"Our central expectations could be wrong," he said. "The MPC has the tools at its disposal to tighten monetary conditions, both in the form of raising Bank Rate and by selling the assets that we bought in 2009 as part of the quantitative easing programme."
