Bank of England monetary policymaker Ben Broadbent said in a speech at Thomson Reuters in London this morning that a faltering global economy will have a ripple effect on the British economy, eventually putting downward pressure on the UK’s high rate of inflation. The result will likely weaken sterling further and will remain weak for some time to come.
“Most importantly for policy today, the international environment is clearly disinflationary,” Broadbent said in a speech delivered at Thomson Reuters London headquarters.
“Slow growth in the United States, the sovereign debt crisis in the euro zone and its knock-on effects on the cost of finance for UK and European banks — all threaten a further tightening in retail credit and a further slowing in domestic activity,” he said.
“These effects are already visible and, over the medium term, look set to dominate any remaining ‘pass-through’ from sterling’s depreciation to domestic inflation.”
Inflation picked up to 4.5 percent in August, and has been well above the Bank of England’s 2 percent target since the start of 2010.
However, Broadbent noted that Britain’s monetary policy framework remained credible, as wage growth was slow and medium-term inflation expectations had not risen. Monetary policy was not to blame for sterling’s weakness, and if the BoE had not allowed inflation to rise above its target, unemployment would have been higher, he added.