High energy costs may trigger inflation, says MPC member

A member of the Bank of England's Monetary Policy Committee (MPC) warned yesterday that soaring energy costs could trigger inflation by lowering potential economic output.

David Walton said that the recent rise in oil prices had come against a background of a recovery in overall economic growth.

In a speech in London, Mr Walton said that while inflation expectations had been stable, the MPC had been able to respond to the negative effect on demand from high energy prices by cutting interest rates last August. "But the Committee also needs to watch carefully for any signs of an adverse impact on supply, particularly now that GDP growth appears to have returned to around its long-run average rate," he said.

He also said it was impossible to know how large the current energy shock would be as oil prices had started rising again while wholesale gas has shot up.

His comments are likely to dent further expectations the Bank is poised to cut rates again. This week, the minutes of its last MPC meeting showed that the majority was worried about the impact that a rate cut would have at a time when the housing and consumer sectors were recovering.

Mr Walton said there were risks in both directions to the Bank's inflation forecast, adding there was no mechanical formula on how the MPC should respond to higher energy costs.

He said the MPC would remain focused on how to keep the balance between supply and demand to keep inflation on target. He also said there had been signs of a pick up in economic activity since the middle of last year, but business investment remained weak.