Incoming Bank of England rate-setter Megan Greene signalled on Tuesday that the central bank may have a tough job returning British inflation to its 2% target, even if it drops quickly at first from double-digit figures.
U.S. economist Greene, who joins the Monetary Policy Committee (MPC) next month as an external member after working as global chief economist at risk consultants Kroll, said the BoE needed to act against signs of persistence in inflation.
British inflation fell in April from double digits to 8.7% but this was still jointly the highest reading among Group of Seven countries, along with Italy.
"I think that there is some underlying persistence and so getting from 10% to 5% ... is probably easier than getting from 5% to 2%," Greene told lawmakers from parliament's Treasury Committee during her pre-appointment hearing.
Short-dated British government bond yields rose to their highest level since 2008 as Greene spoke.
The BoE's forecasts last month showed inflation falling to around 5% by the end of this year, but not reaching 2% until late 2024 or early 2025.
She described inflation expectations in Britain as pretty well-anchored, but said there were lessons from the 1970s on how not to conduct monetary policy.
"If you engage in stop-start monetary policy, you may end up having to tighten even more and generating an even worse recession on the other side," Greene said.
"Inflation expectations can't be allowed to become de-anchored."
Greene will replace MPC member Silvana Tenreyro, who has voted against the BoE's rate increases in recent months. Greene declined to comment on whether she shared Tenreyro's stance.
Financial markets expect the BoE to raise interest rates by quarter of a percentage point to 4.75% next week. Market pricing showed more bets that rates will peak at 5.75% later this year following stronger than expected labour market data on Tuesday.
In her written submission to the committee, Greene said Britain's labour market looks surprisingly tight and the economy has not developed as one might expect given the rise in interest rates. Greene's submission was dated May 25.
Greene also said that if the economy grew faster than 1% a year there would be increased inflation pressures due to poor underlying growth potential, which had been damaged by Brexit.
She said the BoE's quantitative tightening programme, comprising sales of its stock of government bonds and stopping reinvestment of maturing bonds worth a combined 80 billion pounds ($101 billion) a year, probably had a modest tightening effect.
"We do need to go slowly and quite deliberately, in terms of quantitative tightening just to avoid a repeat of the reverse repo rate spike in the fall of 2019 in the U.S. for example," Greene said.
($1 = 0.7959 pounds)
