The dampening effect of the sterling's past appreciation will peak by the end of 2014 and then begin to fade, Kristin Forbes said on Wednesday in her maiden speech after joining the Monetary Policy Committee of the Bank of England.
Sterling's past moves have reduced the risk of inflation increasing sharply, despite the strong growth in employment and the overall economy, she noted.
"A "top down" analysis estimating the pass-through from exchange rate movements to prices suggests that the lagged effect of sterling's appreciation during 2013 and early 2014 may have acted as a powerful dampening effect on inflation," Forbes said.
"But as these calming effects on inflation gradually dissipate, it will become even more important to monitor prospective signs of domestic price pressures to avoid the troublesome inflation sprite," the banker said.
"It is becoming increasingly important to monitor trends in domestically-generated inflation -and especially unit labor costs - so that monetary policy can be adjusted appropriately and also be allowed to work through the economy with its own set of lags," Forbes said.
Recent surveys when taken together suggest that the low levels of domestically-generated inflation, especially in wages, are unlikely to persist for much longer, she observed.
For comments and feedback contact: editorial@rttnews.com
Business News