MERVYN King yesterday tried to play down expectations that the Monetary Policy Committee (MPC) would imminently start raising interest rates to curb inflation, insisting that it would be a “futile gesture”.
Unveiling the Bank of England’s quarterly Inflation Report, in which it lowered its forecast for economic growth this year from 2.6 per cent to around two per cent and confirmed that inflation could reach five per cent before June – more than double its two per cent target for the consumer prices index (CPI), the governor said that people were “running ahead of themselves in saying we are pre-announcing, or laying the ground, for a rate rise.”
Despite King’s protestations, economists yesterday said the growth forecasts contained in the report indicated a hike in just three months’ time in May.
Under the Bank’s “central projection”, which King stressed was not a “pre-announcement” of policy, rates will rise a quarter point to 0.75 per cent in the next four months and to one per cent by the end of the year. By the end of 2012, rates will be at two per cent and at three per cent by the end of 2013.
“The Inflation Report projects that inflation is as likely to be above target as below target 2-3 years ahead and does imply that the MPC is likely to hike rates soon, in the next few months, unless there are major disinflationary surprise,” said Michael Saunders at Citi.
Economists at both RBS and Barclays brought forward their rate rise expectations to May after the report. Nomura economist Philip Rush said that King’s personal scepticism about the urgency of action to tackle Britain’s above-target inflation may lie behind the divergence in tone between the Inflation Report and his own comments downplaying a rise. “The forecasts are the MPC’s collective judgment, whereas what King says often seems to verge off more to his dovish stance,” he added.
The Inflation Report confirmed the divisions on the rate-setting Monetary Policy Committee, saying there was a “wider than usual range of views” on both growth and inflation. Economists interpreted the disclosure as evidence that Andrew Sentance and Martin Weale have been joined by at least one other MPC member in calling for a rate hike.
BANK OF ENGLAND INFLATION REPORT - MAIN POINTS
”True clothing prices were around 5.5 per cent higher than measured in the CPI, equivalent to adding around 0.3 per cent to aggregate annual CPI inflation"
In two years inflation is likely to fall below the Bank's target rate -- if interests rates rise.
l The forecast is based on interest rates increasing to 2.1 per cent by the end of 2011.
"There is a high degree of uncertainty, and a wider than usual range of views among
committee members around the overall look for inflation