Barker Says It's Too Early to Dismiss U.K. Inflation Risk

By Brian Swint and Svenja O'Donnell

Sept. 25 (Bloomberg) -- Bank of England policy maker Kate Barker said there's a threat that the fastest inflation in a decade may persist even as the financial crisis raises the chances of the bank undershooting its target for consumer prices.

``The latest developments in financial markets have now increased the downside risks,'' Barker said in Wilmslow, England today. ``I remain somewhat concerned about the possibility of more persistent higher inflation, even as growth slows.''

The comments suggest Barker may be wary of the call by her colleague, David Blanchflower, for immediate interest-rate cuts. The crisis that pushed U.K. mortgage lender HBOS Plc into an emergency sale last week is choking the supply of credit to companies and households, pushing Britain toward its first recession since the early 1990s.

``There are real dangers that the impact of these will be a downturn in the economy which is unnecessarily large, and would therefore result in a large undershoot of the inflation target,'' of 2 percent, Barker said in a speech. ``In these circumstances, judgments about the timing of any change in policy that may become necessary are particularly difficult.''

Blanchflower, another of the nine members of the Monetary Policy Committee, said this week that unemployment will jump and the bank needs to lower rates ``decisively and soon.'' He voted for a half-point cut from the current 5 percent interest rate at the September meeting. The rest kept the rate unchanged.

`Prolonged Hump'

``The rise in energy prices is leading to a rather more prolonged hump in overall inflation than the MPC expected earlier this year,'' Barker said. ``It may be too soon to dismiss completely the risk of significantly higher wage growth in the wage round early in 2009, although it is now receding as the labor market weakens.''

Inflation accelerated to 4.7 percent in August and has ``probably not yet reached the peak,'' Barker said today. While prices have declined 28 percent since hitting a record in July, the depreciation of the pound against the dollar may blunt the effect of lower fuel costs in the U.K., she said.

``To bring inflation back to 2 percent in two years, unless there is an unexpected shift in some of these external factors, might prove demanding,'' Barker said. ``In addition, continually changing credit conditions means that it is not easy to form a clear view about the restrictiveness of a 5 percent bank rate.''

Barker also defended the bank's target for consumer price inflation, saying that changing the goal ``now would be to run considerable risks with credibility.''

The Bank of England will wait until November before cutting the rate to 4.75 percent, according to the median forecast of 24 economists in a Bloomberg News survey. The next interest-rate decision is on Oct. 9.

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Svenja O'Donnell in London at sodonnell@bloomberg.net.