Higher inflation may not automatically lead to an interest rate rise, according to one of the Bank of England’s top officials.
Gertjan Vlieghe, one of the members of the rate-setting Monetary Policy Committee, told the Times consumer prices could rise well beyond the Bank’s current forecasts before interest rates rise.
Vlieghe said: “For example, if it turns out the pass-through of exchange rate to inflation is faster than our baseline estimate, that would mean inflation might go higher to 3 or even 3.5 per cent."
“But it would also mean it would come down faster afterwards," he added. "It is not at all obvious what the impact for monetary policy would be and it might not have one. If that is the reason why inflation is higher than expected, it does not necessarily have an impact unless it also feeds into inflation expectations.”
At its last meeting on monetary policy the Bank said it expected consumer price inflation (CPI) to peak at 2.75 per cent in early 2018, before falling back towards its two per cent target.
However, that forecast was made before the latest inflation figures which showed prices rose at an annual rate of 2.3 per cent in February, leaving little leeway for further price rises before the Bank has to revise its forecasts.
The MPC has made it clear it will look through inflationary price rises as long as it judges them to be related to the effects of the devaluation of sterling rather than having domestically generated sources.
Vlieghe said to the Times: “If inflation is higher than expected because we think there is a general pick-up, then it is not just the exchange rate doing the work, that is absolutely something we need to respond to and I will be joining the response to that.”