Inflation is likely to fall to just over 3 percent by March, but it is its evolution after that which will be key for the future course of monetary policy, Bank of England chief economist Spencer Dale said on Tuesday.
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.
Dale said there was still scope for the Bank to do more quantitative easing asset purchases, with no shortage of gilts for it to buy. The more binding constraint, he said, was if doubts developed about QE's effectiveness.
Dale said that the euro zone was casting a big shadow over Britain's growth prospects, but said that if the euro zone crisis did not escalate, there was a risk that British inflation could prove persistent than the Bank forecasts.
November inflation data -- due at 9:30 a.m. -- is forecast to show a fall to 4.8 percent from 5.0 percent, still far above the Bank's target. The Bank forecasts inflation of below 2 percent by the end of 2012.
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, he said.
(Reporting by David Milliken and Fiona Shaikh)