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LONDON (Reuters) - Chancellor Mark Carney said on Tuesday that there were limits to the central bank's ability to ignore the effect of sterling's slide on inflation, as policymakers consider whether to cut interest rates next week.
Carney also told lawmakers that political criticism would not influence his decision on whether to extend his time at the BoE, but warned that any interference with its independence would hurt the currency and push up government borrowing costs.
The pound slumped on Tuesday to its lowest level since the Oct. 7 'flash crash' but recovered some of its losses as Carney spoke to a committee in Britain's upper house of parliament.
"There are limits to the willingness of the Monetary Policy Committee to look through an overshoot of inflation," he said, describing the depreciation of sterling in recent weeks as "fairly substantial".
The BoE would "undoubtedly" take sterling's weakness into account at its rate-setting meeting next week, he said.
In early September the central bank said it was likely to cut rates again this year if the economy slowed as it expected. But sterling's weakness and unexpectedly robust economic data have prompted most economists to rule out a Nov. 3 rate cut.
"Tactically it feels like they are going to hold off in November because of the currency concerns," RBS (LON:RBS) economist Ross Walker said, adding the tone from the BoE about the fall in the value of the pound had become a "little bit edgier".
Sterling slid 13 percent against the U.S. dollar in the days after Britain voted to leave the European Union in June. It lost a further 5 percent earlier this month after Prime Minister Theresa May suggested a tough line on the Brexit talks.
"Sterling starts to really move as it becomes clearer the timing of the Article 50 triggering (to start Brexit talks), and the market's perception - and I really underscore it's the market's perception - of what the potential relationship will be between the United Kingdom and Europe," Carney said.
He said "that perception may well be mistaken" and the BoE had to judge how long sterling weakness was likely to last as it tried to work out its implications for inflation.
"It is important to say that that judgement is a judgement about the optimal trade-off," he said, adding that in the longer-term - around three years away - he expected inflation to fall sharply as the impact of the slide in sterling faded.
Supporters of Britain leaving the EU are upset with Carney over the tone he struck in the run-up to June's referendum when the central bank assessed the risks of leaving the bloc.
Carney said he would not be swayed by political concerns as he weighs up whether to extend his stay at the British central bank beyond his scheduled departure in 2018.
"I want to find some time to reflect on it," Carney told members of the House of Lords, when asked about the factors that he was considering as he weighed up how long to stay at the BoE.
Carney, a Canadian, is due to say before the end of the year whether he will take up an option to stay at the BoE until 2021.
"It is entirely personal, and no one should read anything into that decision in terms of government policy, actual, imagined, potential, past, etc.," he said. "This is a role that requires total attention, devotion, and I intend to give it for as long as I can. But those are the only factors."
Carney said he did not think Prime Minister May was proposing a change in the way monetary policy is set when she talked about the "bad side-effects" of low interest rates.
But he has come in for criticism from other members of the ruling Conservative Party, most recently Michael Gove, a defeated party leadership contender, who said on Friday that Carney was so sensitive to criticism that he reminded him of emperors in mediaeval China who had challengers flayed alive.
Carney said investors would demand a higher return for holding British assets, including government bonds, if the central bank's independence was called into question.