Bank of England governor rules out rate rise as inflation hits new peak

Mervyn King predicts more petrol and utility price rises and voices fear for UK’s ability to cope with higher borrowing costs The governor of the Bank of England has warned against raising interest rates, insisting that the strongest inflationary pressures in two and a half years – which saw the cost of living index rise sharply last month from 4% to 4.5% – would prove temporary. In a letter to the chancellor George Osborne, Mervyn King said the Bank expected inflation to slip back towards its official 2% target during 2012 and 2013. Figures from the Office for National Statistics showed that inflation, as measured by the Consumer Price Index, was driven up in April by higher air fares during a late Easter, more expensive petrol and energy prices, and the increased cost of drinking and smoking triggered by changes to excise duties in the Budget. King is obliged to write an explanatory letter to the chancellor every three months if inflation is more than one percentage point higher or lower than its target, and yesterday used the sixth since February 2010 to stress that further increases in the cost of living were on the way. “Inflation is likely to rise further over the next few months, as increases in the price of energy are likely to raise petrol prices and make it more likely that there will be substantial increases in utility bills later in the year,” the governor said. King expressed concern about the ability of the UK to cope with higher borrowing costs, noting that economic output was still 4% below its level at the start of the recession in 2008. “Unemployment is high and wage growth is weak at around 2% a year. Money and credit growth are both very low. It is therefore possible that, as the temporary influence of the factors currently pushing up on inflation wanes, these downward pressures … could drag inflation below the target.” He added: “The MPC [monetary policy committee] judges that attempting to bring inflation back to the target quickly risks generating undesirable volatility in output and would increase the chances of undershooting the target in the medium term.” The City said King’s comments suggested the Bank’s nine-strong committee was unlikely to raise interest rates in the near future. This view was reinforced by testimony given by the MPC’s new member, Ben Broadbent, to the Commons Treasury committee. Broadbent has replaced the MPC’s strongest supporter of higher interest rates, Andrew Sentance, but the former Goldman Sachs economist told MPs he saw little risk of a wage-price spiral developing. Osborne accepted the Bank’s explanation that higher inflation had been caused by a combination of the increase in VAT to 20%, the increased cost of imports caused by the depreciation of sterling, and rising global commodity prices. “I recognise the opposing risks to inflation are material, particularly given the recent volatility in energy and commodity prices,” he replied to King. “I welcome the MPC’s continued commitment to respond flexibly to the economic outlook and to set policy to balance the upside and downside risks in order to meet the inflation target in the medium term.” Angela Eagle MP, the shadow Treasury chief secretary, said: “Millions of people on low and middle incomes are being squeezed from every direction by rising prices made worse by the Tory VAT rise.” The ONS said prices rose by 1% last month compared to 0.6% in April 2010. Officials said 0.4 percentage points of the increase had resulted from the timing of Easter, with airlines putting up their fares during the holiday. Andrew Smith, chief economist at accountants KPMG, said: “The increase is again due to ‘temporary’ factors, but with inflation heading to 5% the doves on the MPC will need strong nerves. The picture is still of a fragile underlying economy and with austerity measures now starting to bite, a rise in interest rates could be the undoing of the recovery.” Viewpoint, page 24 → Interest rates Inflation Bank of England Mervyn King Economic growth (GDP) Economics Economic policy Larry Elliott guardian.co.uk

Posted by on May 17, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.