INFLATION stormed back to 4.5 per cent in April, official data revealed yesterday, provoking widespread attacks on the Bank of England.
Bank governor Mervyn King was forced to write a letter of explanation to chancellor George Osborne on Monday, detailing why inflation remains above target.
Since coming to office Osborne has received a letter from King every three months, as inflation is more than one per cent above the Bank’s two per cent target.
“At some point, the Bank will have to acknowledge that it is not enough just to forecast it will hit the inflation target in the future,” said Citigroup’s Michael Saunders.
“It actually has to hit the inflation target on average on a sustained basis,” said Saunders, who has also accused governor King of prioritising a weak pound to boost the UK’s net trade figures.
“The Bank’s committee has tended not to be too concerned with sterling remaining weak, and has acknowledged that it needs to remain weak to boost net trade,” added Nomura’s UK economist Philip Rush.
“And they completely ignore effects that come through the exchange rate on sterling, which are substantial.”
The Bank’s stance is “dragging the whole target mechanism in the mud,” economics professor Patrick Minford of Cardiff Business School told City A.M. “It’s destroying its credibility, it constantly finds a reason not to raise rates.”
The Bank remains insistent on keeping interest rates at their historical low, despite admitting that it is likely to miss its inflation target constantly until 2013.
“At this rate of inflation the value of £1 will decline by half every 13 years,” said Tory backbencher Douglas Carswell. “Not really the basis for creating a prosperous and productive economy, is it?”