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Inflation will stay high

Wednesday, 14 May 2008 12:00 AM

UK inflation is forecast to stay high for a number of months, the Bank of England governor warned today.

Mervyn King admitted inflation will stand over three per cent for a number of months and economic growth will fall sharply.

Bank projections point to inflation staying over three per cent for until 2009 - and will not return to two per cent until 2010.

The Bank of England's Inflation Report states: "In the central projection.GDP growth slows under the influence of weaker real income growth and tighter credit supply.

"But inflation rises further above the two per cent target and remains there for several quarters as energy and import prices pick up sharply."

Mr King suggested with inflation standing over three per cent for a number of months, he would be forced to write to the chancellor to explain the problem.

In fact the governor admitted he would write a number of letters to the chancellor of exchequer.

He said: "There will be plenty of opportunities to write letters."

Letters are written to the chancellor when CPI inflation is over three per cent every there months.

However, the Bank's Inflation Report sets out how inflation will eventually fall.

Mr King said: "Inflation will return to target, growth will return. But we must be patient."

He also admitted there was "significant uncertainty" in the Bank projections.

Mr King also set out a clear message that the monetary policy committee (MPC) would focus on inflation, rather than cutting rates to boost the economy.

He said: "Monetary policy cannot rebalance economy. The MPC must focus on inflation."

Jonathan Loynes, chief European economist at Capital Economics, stated high inflation predictions rule out big interest rate cuts.

He said: "The Bank of England's May Inflation Report suggests that the MPC will not deliver the rate cuts which the news on the economy suggests are sorely needed.

"The CPI forecast based on market interest rate expectations (of rates falling to around 4.5 per cent) has been revised up sharply from February's Report, now peaking at close to four per cent at the end of this year and remaining above three per cent for a number of quarters.

"At the same time, the forecast for GDP growth has been pulled down quite sharply, with growth now troughing at just one per cent at the end of this year before recovering in 2009."

He added: "A June [interest rate] cut now looks pretty unlikely and any further loosening will be modest in the foreseeable future - seriously bad news for the economy."

Daniel Barnes

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