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UK's central bank holds its nerve after inflation soars to 4pc

Jennifer Ryan and Svenja O'Donnell

Published 16/02/2011 | 05:00

Bank of England Governor Mervyn King. Photo: Getty Images
Bank of England Governor Mervyn King. Photo: Getty Images

BANK of England Governor Mervyn King kept up his argument that an acceleration in inflation was temporary after consumer-price growth soared to twice the central bank's target of 2pc.

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In his fifth consecutive letter to the Chancellor of the Exchequer, delivered on Monday, Mr King said that while there was a "great deal of uncertainty" about inflation, the bank's view was that it's "about as likely to be above the target as below it, two to three years ahead".

Consumer prices rose an annual 4pc in January, data showed -- the highest since November 2008.

Mr King said there were "real differences of view" within the Monetary Policy Committee (MPC) about the risks to the outlook for inflation.

He will make a second public defence of his position today when he presents the bank's quarterly economic forecasts, amid dissent from some policymakers on the need for higher interest rates to tame inflation.

Raise rates

Some economists said the data may encourage the bank to raise rates as early as May.

"The MPC 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," Mr King said in his letter to the Chancellor, George Osborne.

Inflation has been above the bank's target for 14 months.

Mr King blamed the surge on the government's sales-tax increase, higher commodity costs and the weaker pound.

"It will make the Bank of England very uncomfortable and it will really be feeling the heat," said Hetal Mehta, an economist at Daiwa Capital Markets Europe.

"There is a real possibility that commodity and food prices keep exerting upward pressure and that makes it difficult for the bank not to signal that it's at least looking at tightening policy by the end of the year."

Mr King said in his letter to Mr Osborne that the "central judgment" remains that "inflation will fall back, so that it is about as likely to be above the target as below it two to three years ahead".

Irish Independent

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