Inflation may not fall as fast as the Bank of England forecasts next year, Bank's chief economist Spencer Dale said on Tuesday, placing a question mark over his support of future quantitative easing to boost the economy.
With a dismal growth outlook for 2012 as the euro zone crisis looms large, most economists expect Britain's central bank to back more quantitative easing in February when October's 75 billion pound programme of purchases is complete.
Dale did not address this expectation directly, but did say that he needed to be convinced that underlying inflation pressures were easing as hoped before he would be confident about taking further action to boost growth.
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 ... from the spring of 2012 onwards is far more uncertain and far more important for the future stance of monetary policy, he continued.
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 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.
RBC economist Jens Larsen -- who used to work at Bank -- said that Dale was drawing an important line in the sand, although he was still likely join in a unanimous Monetary Policy Committee vote for more QE in February.
He's certainly the most reluctant, but I think by the time they get to February they will just have had the first estimate of fourth quarter GDP, which will be weak. But down the line in May, he will be the main proponent for stopping, Larsen said.
Tuesday's data did not give a clear indication that core inflation pressures were easing, Larsen added.
It's hard to be confident that core inflation is coming off, and I think Dale may be on to something. If inflation doesn't continue to fall in Q2, the MPC will have a really tricky issue explaining what they've been up to.
Dale is one of the most hawkish members of the MPC, having backed rate rises earlier this year, and some other economists were more confident that inflation would fall sharply next year and enable the BoE to confidently approve more QE.
Come January -- when the VAT rise drops out -- it should start to fall like a stone. We still think that inflation will be below its target by the autumn, before dropping to 1 percent or lower, said Capital Economics' Vicky Redwood.
And Dale himself said that there was still scope for 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 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 and the economy was unlikely to generate enough jobs and growth in coming quarters, he added, in line with recent Bank comments.
Nonetheless, that did not mean more QE was a done deal.
Until we get a better sense of underlying inflation pressures I think there will be a nervousness in terms of the extent to which one should keep on stimulating the economy, he told Bloomberg TV in an interview after his speech.
The main threat for the future came from the euro zone, which was casting a big shadow over Britain's growth prospects. 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.
(Additional reporting by Sven Egenter, Olesya Dmitracova and Keith Weir; Editing by Ruth Pitchford)