A sharp fall in inflation in early 2012 may not be enough to enable the Bank of England to decide whether to continue with its policy of quantitative easing, the central bank's chief economist said on Tuesday.
Spencer Dale, who also sits on the Bank's Monetary Policy Committee, said inflation was almost certain to drop to just over 3 percent by March, as one-off effects such as last January's rise in sales tax drop out of the data.
The fall in inflation over the next few months is not likely to shed much light on the persistence of inflation beyond that. The base effects are already baked in the cake, Dale said in a speech at media company Bloomberg.
The behaviour of inflation in the second phase, from the spring of 2012 onwards, is far more uncertain and far more important for the future stance of monetary policy, he continued.
Most economists currently expect the Bank to announce an extra 75 billion pounds of asset purchases at its February monetary policy meeting, to follow almost directly on from the four-month programme of purchases launched in October.
Dale was speaking as the Office for National Statistics released data showing inflation fell in November to 4.8 percent from 5.0 percent, in line with economists' forecasts.
Inflation peaked at a three-year high of 5.2 percent in September, but the Bank predicts it will be below its 2 percent target by the end of 2012 due to the fading of one-off effects and broader economic weakness.
There is certainly a possibility that inflation could fall significantly below the target, especially if demand turns out to be weaker than we expect. But there is also a risk -- especially in the absence of an escalation of the euro area crisis -- that inflation could prove to be more persistent, Dale said.
He said there was still scope for the Bank to do more quantitative easing, with no shortage of gilts for it to buy. The more binding constraint, he said, was if doubts developed about QE's effectiveness.
He devoted much of his speech to countering criticisms of the Bank's QE programme, and said that while short-dated government bond yields were at record lows, longer-dated yields could still fall further.
However, he conceded that QE was not as effective a tool as he would like in boosting credit to smaller businesses, as they lacked direct access to capital markets.
Business surveys suggested that growth had come to a standstill in the last three months of 2011, he said, in line with recent Bank comments.
The euro zone was casting a big shadow over Britain's growth prospects, he added, but much of the past year's weakness in growth was due to an unavoidable fall in living standards caused by higher energy costs and import prices.
(Reporting by David Milliken and Fiona Shaikh)