Mervyn King hints at May interest rate rise
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Bank of England governor Mervyn King has hinted interest rates may rise in May, with further increases possible by the end of the year.
In his open letter to Chancellor George Osborne, triggered by inflation remaining above its 2 per cent target, King (pictured) says inflation is likely to remain well above target for this year, before falling back in 2012.
He says this prediction is based on bank rate increases “in line with market expectations”. Many experts have suggested a 0.5 per cent rise in rates is likely in May with further rises throughout the year.
King says three factors account for the current high level of inflation, including the January rise in VAT, the continuing consequences of the fall in sterling in late 2007 and 2008 and recent increases in commodity prices, particularly energy prices.
He says: “Although one cannot be sure, prices excluding the effects of these factors would probably have increased at a rate well below the 2 per cent inflation target.
“Inflation is likely to continue to pick up to somewhere between 4 per cent and 5 per cent over the next few months. That primarily reflects further pass through from recent increases in world commodity and energy prices.
“The MPC’s-central judgment, under the assumption that bank rate increases in line with market expectations, remains that, as the temporary effects of the factors listed above wane, inflation will fall back so that it is about as likely to be above the target as below it two to three years ahead.”
Last week, the Bank of England’s Monetary Policy Committee held base rate at 0.5 per cent for the twenty-third month in a row and held its quantitative easing programme at £200bn.
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Readers' comments (16)
Anonymous | 16 Feb 2011 9:26 am
It doesn't take a genius to work out that if VAT increases along with rocketing fuel costs then inflation happens. The MPC usually helpsby leaking rumours to suppress any chances of a 'feel good factor' helping propel this country to recovery.
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Anonymous | 16 Feb 2011 9:45 am
It amazes me that king comes out with the ovious a 10 year old kid probably know more.How is this country going to get out of the mess with higher mortgage repayments when bank rates go up aligned with the already spiraling costs of food, energy can the govenor expalin that to the man in the street
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T Johnston | 16 Feb 2011 9:54 am
Increasing rates will only knock the economy back into recession. Repossessions will rise and consumer spending (already very restrained) will be reduced. Unfortunately the BOE should have kept interest rates higher during the early noughties when cheap imports artificially kept inflation low. For this same reason (external factors) inflation is now high and a reduction in consumer spending will not help. The hope of strengthening sterling may not result as an increase in rates will weaken the economy. Hold your nerve and don't let ITN or Sky News dictate.
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John Hooper | 16 Feb 2011 9:56 am
I have never been convinced (as a non economist) that rises in interest rates kerb inflation- in fact quite the opposite as recent History shows. Is this the beginning of inflation spirralling out of control with an increase in wage demands, strikes, effects of the stirling and ofcourse the anticipated effect of quantitative easing starting to 'kick in'. The brain drain has also started, with even students looking at studying abroad. Thank you Mr Brown for ruining this Country!!
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Evan Owen | 16 Feb 2011 10:16 am
All praise the god of inflation.
Why have a target which can never be met!!!
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Anonymous | 16 Feb 2011 10:20 am
How does this work. I am a small business. You put VAT up so everything costs more. You put duty up on fuel so everything costs more. Then because everything costs more you put interest rates up so my mortgage goes up as well. And then you tell me it my fault for spendiong too much. The tories monetary policy is seriously ******. Reduce VAT and keep interest rates low so the country can work for you. Not against you.
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Richard Arnold | 16 Feb 2011 10:55 am
An increase in interest rates is illogical and sounds more like panic or part of a policy to maintain consumer caution and suppress house price increases which usually occur as an economy moves out of recession.
The current government strategy relies on the expectation of growth from the private sector. To this extent the difficult play hear is the interplay between policy to reduce national debt and policy to promote economic recovery.
In this business cycle, an acceleration of inflation can support a temporary acceleration of growth. Ultimately achieving high sustained GDP growth is about fundamental issues of economic reform, and inflation has less impact on outcome.
Increasing interest rates will be counter productive in the short term ie next 18 months taking into account the current known facts.
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Notstradamus | 16 Feb 2011 11:59 am
Here we go again! This may help them to reach pointless inflationary targets, but the cost to the average person will be very high. These people don't live in the real world. This is a very dangerous game to start playing at this time and one that can easily get out of control.
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Peter Herd | 16 Feb 2011 12:06 pm
I'm a fan of Mervyn King due to the fact that he predicted the problems of the housing market back in 2005 but was not given the tools to sorted out by the Labour Party.
As he has clearly stated the inflationary pressures that we see are mainly external and interest rate rises will do little to stem this type of inflation. The problem comes when wage demands start to filter through and if these are significant they could start to affect real asset prices in the UK. Therefore interest rate could be used as a weapon to control these asset prices particularly if the UK returns to normal growth.
The main difference with European monetary policy and the US is that the US also has a growth target which gives the Fed more flexibility around interest rates. The Conservative government recently gave the Bank of England a directive to provide economic stability as well as controlling inflation and this may explain why the Bank of England has not rushed to put up interest rates. If you read Mervyn King's letter you will see that he is concerned about the other effects the interest rate rises will cause.
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Mr Fisher | 16 Feb 2011 2:17 pm
Me thinks he protest too much..
The Bond markets are the one to watch if the gilt rates start to rise and the allied insurance premium then look out.
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