Bank of England rules out swift rise in rates
The Governor of the Bank of England yesterday suggested the Bank is unlikely to raise interest rates immediately in response to inflation rising above its 2pc target.
Mervyn King, speaking at the annual Mais Lecture at the Cass Business School, said: “From time to time shocks will move inflation away from its desired long-run level, and the policy question is how quickly should it be brought back to that level. There is no right or wrong answer to that question.”
However, he also noted that “many of the problems of the past resulted from the failure to take action before expectations had started to drift upwards, and the cost of that inaction proved to be high.”
Economists, alongside the futures and currencies markets, are starting to shift towards a belief that the next move in interest rates will be a cut, to stimulate stagnant consumer demand.
Inflation remained constant last month at 1.9pc, as falling food and travel prices offset steep rises in the water and sewerage bills.
Water bills rose by 13.5pc in April, three times the normal rate. The rise was enough to take goods price inflation into positive territory for the first time since 1999 at 0.2pc. Household bills in general rose by 6.5pc – the steepest rise on record.
Which means that it still appears likely to breach the 2% limit in the next three to four months, but that event has lesser significance in the face of the debate about where growth is headed.
The Governor also said continuing stability will depend on whether monetary policy can respond to “the economic shocks that will undoubtedly be visited upon us in the years ahead.”
He said: “The challenge ahead is that if a shock were to move inflation significantly away from target, then inflation expectations might become dislodged from the target. The behaviour of expectations and so the economy as a whole would change.”
Mervyn King, speaking at the annual Mais Lecture at the Cass Business School, said: “From time to time shocks will move inflation away from its desired long-run level, and the policy question is how quickly should it be brought back to that level. There is no right or wrong answer to that question.”
However, he also noted that “many of the problems of the past resulted from the failure to take action before expectations had started to drift upwards, and the cost of that inaction proved to be high.”
Economists, alongside the futures and currencies markets, are starting to shift towards a belief that the next move in interest rates will be a cut, to stimulate stagnant consumer demand.
Inflation remained constant last month at 1.9pc, as falling food and travel prices offset steep rises in the water and sewerage bills.
Water bills rose by 13.5pc in April, three times the normal rate. The rise was enough to take goods price inflation into positive territory for the first time since 1999 at 0.2pc. Household bills in general rose by 6.5pc – the steepest rise on record.
Which means that it still appears likely to breach the 2% limit in the next three to four months, but that event has lesser significance in the face of the debate about where growth is headed.
The Governor also said continuing stability will depend on whether monetary policy can respond to “the economic shocks that will undoubtedly be visited upon us in the years ahead.”
He said: “The challenge ahead is that if a shock were to move inflation significantly away from target, then inflation expectations might become dislodged from the target. The behaviour of expectations and so the economy as a whole would change.”
May 18, 2005
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