BoE heads for row over UK stimulus

BANK OF ENGLAND governor Mervyn King will be readying his pen this morning to write his second letter to chancellor George Osborne if annual inflation was, as expected, above three per cent last month.

City economists expect headline consumer price index (CPI) inflation to ease to 3.1 per cent in July from 3.2 per cent in June, well above the Monetary Policy Committee’s (MPC) two per cent target. CPI has been consistently above three per cent for the whole of 2010 and the Bank of England was forced to revise upwards its inflation forecast at last week’s Inflation Report.

Rampant inflation is unlikely to ease significantly in the coming months given the looming VAT hike and higher food prices. This has been cause for concern among MPC members with Andrew Sentance having voted twice to raise rates.

However, some analysts envisage a three-way split of the MPC when the August minutes are published tomorrow. Andrew Sentance is forecast to stick to his hawkish stance while two members may have voted for further QE. Names touted by economists include David Miles and Adam Posen.

Meanwhile, annual inflation in the Eurozone accelerated in July to 1.7 per cent, the highest level since November 2008. It was boosted by a surge in energy price inflation and recent VAT hikes in Spain, Portugal, Greece, and Finland.