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BoE's Tucker says guidance no risk for inflation

The Deputy Governor of the Bank of England, Paul Tucker, is seen addressing the International Association of Deposit Insurers Annual Conference in London in this October 25, 2012 file photograph. REUTERS/Neil Hall/Files

LONDON (Reuters) - The Bank of England's new forward guidance policy does not weaken its commitment to stable inflation even though its understanding of productivity trends is limited, deputy governor Paul Tucker said on Tuesday.

Tucker said that forward guidance on interest rates continued the bank's cautious, "probing" approach to monetary policy, under which it paused after providing stimulus to see if inflation expectations had been inadvertently pushed upwards.

"I do not see the forward guidance - and personally would not favour - committing the (Monetary Policy) Committee to knowingly keeping policy loose beyond the point that would be prudent," he said in a speech at a financial markets conference in London.

In August the bank announced a new strategy of keeping its interest rates at a record low at least until Britain's unemployment rate falls to 7 percent, something it expects only in late 2016, or if inflation expectations rise.

The announcement coincided with signs that the economy's recovery was picking up speed, which pushed up interest rates in financial markets and sterling, raising questions about the effectiveness of the bank's plan.

Tucker, in his speech on Tuesday, said giving guidance on the BoE's rates was important during a recovery.

"These are conditions in which it would be very easy for the financial markets, businesses and households to jump to the mistaken conclusion that monetary stimulus will soon begin to be withdrawn," he said.

"Given the slack in the economy, the Committee is not in a rush."

Tucker said the BoE did not yet understand why British productivity had been so weak since the financial crisis and he did not regard a slow fall in unemployment as much more likely than a period of robust job creation.

That sounded more cautious than Tucker's fellow monetary policymaker David Miles who earlier on Tuesday said it was plausible that Britain could have economic growth back at average levels or stronger for the next six to eight quarters while unemployment did not fall much.

"As data comes in, the Bank's projections for unemployment are far more likely to change, in one direction or the other, than the Committee's forward guidance," Tucker said. "Probabilistically, that could explain part of the rise in the money market curve given the signs of recovery."

* For the full speech, see http://www.bankofengland.co.uk/publications/Documents/speeches/2013/speech679.pdf

(Reporting by William Schomberg and David Milliken; Editing by Hugh Lawson)