Bank of England governor Mervyn King has calmed expectations of an early interest rate rise.
Presenting the bank’s inflation report, he has said “some people are running ahead of
themselves” by scare mongering about an imminent rise in rates.
The Bank of England base rate has stood at 0.5% for two years, but economists and investors
expect an increase as the bank battles to curb rising inflation.
But Mr King has quelled fears of an imminent rise with his statement.
“It is clear that at some point the bank rate will have to go up. Anyone making long-term
financial decisions should not expect bank rate to be at these low levels indefinitely. The
judgement about timing and the speed at which the bank rate will rise is a difficult one.”
The clamour about increasing interest rates follows an expected inflation rise to 4% – well
outside the economy’s comfort zone at double the government’s target figure of 2%.
In a letter to Chancellor George Osborne explaining why inflation is running so high, Mr King
predicted that it won’t fall back to 2% for two years or more.
He also told the City to expect a higher rate of 4.7% or more over the next few months.
Overall, the Bank expects inflation to fall to 1.7% – below the target – over the next two
years, when VAT increases and rising food and fuel costs have worked their way through the
economy.
The Bank’s monetary policy committee is starting to divide on inflation strategy – two
members are lobbying for rate increases, while Mr King and the others are plumping to sit
tight for the time being.
Mr King’s statements should calm the housing market, where millions of homeowners are
dreading any change in interest rates. Even a small upward shift of 0.25% could add several
hundreds pounds to the average family’s mortgage repayment bill every year.
Markets responded well to the inflation report, with the Pound strengthening slightly against
the Euro.
