Credibility risk places pressure on BoE’s King

BALLOONING global prices and stubbornly above-target inflation in the UK are piling pressure on the Bank of England’s rate setting committee to tighten its monetary policy.

The Monetary Policy Committee (MPC) makes its latest announcement on interest rates at lunchtime today.

The MPC is expected to hold rates at the historically low 0.5 per cent, yet expectations are beginning to rise of rate increases in coming months.

Overnight index swap (OIS) rates now point to a rates rise in the third quarter of this year, and an increase to two per cent by the end of 2012, Capital Economics reported.

British consumer price index (CPI) inflation is forecast to hit four per cent in the first quarter of this year, according to ING bank, double the Bank’s two per cent target.

Last week global food prices hit a record high, according to the United Nations, while petrol prices in the UK are approaching £1.30 a gallon.

Despite worldwide prices pressures, inflation in the UK is considerably higher at 3.3 per cent than the current Eurozone average of 2.2 per cent.

The MPC should respond by immediately nudging rates upward, former senior Treasury official Sir Steve Robson said this week.

Failure to act endangers the Bank’s credibility by arousing suspicions that inflation is being allowed to rise to erode the value of the government’s debts, Robson said.