BoE raises alarm over inflation

Britain's current high inflation may now be at greater risk of lasting into the medium term, the Bank of England warned, casting doubt on whether it will inject more economic stimulus next month.

Minutes to the BoE's April 4-5 meeting showed on Wednesday showed that a long-standing advocate of more quantitative easing, Adam Posen, had dropped his call for more stimulus, and that others were worried the BoE's anti-inflation commitment risked being called into question.

One of the nine members of the Monetary Policy Committee, David Miles, continued to support more QE.

Most economists had not expected the BoE to do more QE next month, when the 50 billion pounds of QE approved in February will be complete. But prospects for this had received a boost after weak British factory and construction output data, and a worsening in the euro zone situation.

The BoE said that the policy challenge it faced was thrown into “sharp relief" by increased risks of high inflation over the past month, and official data that may result in the Office for National Statistics reporting contraction in the first and second quarters.

However, the BoE showed deep scepticism about the sharp fall in non-seasonally adjusted construction output that it suspected could lead the ONS to report a fall in first-quarter GDP next week, putting Britain in a technical recession.

The sharp falls in construction output in December and January were perplexing, and the Committee was minded not to place much weight on them," the minutes said. “But a wide range of survey indicators pointed to a moderate rate of growth in activity in the first half of the year."

The BoE's greater concern appeared to be inflation.

It said that inflation - currently 3.5 percent - was likely to fall more slowly than it had forecast in February, due to higher oil prices, the risk of firms boosting profit

margins and weak productivity growth.

There was a greater chance than before that above target inflation would persist into the medium term."

Posen told reporters on Tuesday that the BoE would have to rethink its policy plans if core inflation failed to show a sustained fall.