LONDON (dpa-AFX) - The Bank of England must have a prudent approach to reducing interest rates as the U.K. inflation may remain high for a longer time than expected rather than a short-term spike, and also due to risks on the global front including fluctuations in oil prices in the backdrop of the ongoing Middle East conflict, policymaker Megan Greene said on Tuesday.
'I worry about the near-term profile for inflation this year, which in my view now resembles more of a 'plateau' than a 'hump',' Greene, a member of the Monetary Policy Committee, said in a speech at the think tank National Institute of Economic and Social Research.
Headline consumer price inflation was 3.4 percent in May, which was slightly slower than the 3.5 percent in April, but well above the central bank's 2 percent target and exceeded expectations. Core inflation that strips out volatile items eased to 3.5 percent from 3.8 percent.
The BoE expects inflation to resume its return to the target from early next year. Greene pointed out that there is a risk that high inflation of 3.5 percent could last longer for the rest of the year and feed into inflation expectations as well as influence wage and price setting behavior.
Further, household inflation expectations are elevated as food prices have consistently surprised to the upside, and business' price growth expectations are also high, Greene noted.
'The risk that our near-term plateau in inflation feeds through into second round effects is skewed to the upside,' Greene said. 'This is even more a concern in light of the escalating conflict in the Middle East, which poses upside risks to oil prices.'
Last week, the U.K. central bank left the bank rate unchanged at 4.25 percent. Greene was among the rate-setters who voted to hold the rate steady.
'Noisy data means that it will take longer for me to take comfort from recent disinflationary trends,' Greene said. The central banker also observed that the uncertainty caused by the U.S. trade tariffs, the federal budget and the Middle East conflict is unlikely to subside soon.
Therefore, 'a careful and gradual approach to removing monetary policy restrictiveness continues to be warranted,' Greene added.
The policymaker also said that financial arbitrage opportunities for banks arise as major central banks - the Fed, ECB and BoE, are reducing their security holdings as part of their balance sheet normalization efforts. However, the scope of these opportunities is 'fairly limited', Greene added.
'The willingness of banks to identify and act on pricing differentials is a feature of our system, not a bug,' Greene said.
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