Bank of England governor Mervyn King has warned that inflation could reach 3 per cent in the coming months, missing the monetary policy committee’s target.
He says big interest rate cuts, as recently seen in the US, are unlikely in the UK and that rising food and fuel prices will put household finances under serious pressure.
Delivering the MPC’s quarterly update on the state of the economy, King said: “In the central projection, inflation rises sharply from the 2.2 per cent in January to around the level at which I would be required to write an open letter to the Chancellor.”
The forecast rise reflects higher prices for domestic gas and electricity, petrol and food. The lower level of sterling is also likely to push up import prices.
King warned that the period of high spending made possible by low interest rates, easy credit and a low cost of living has come to an endand he said everyone must face a reduction in their standard of living.
He predicted that slow-ing demand will bring inflation back to the target in the medium term and urged employees to show restraint in negotiating higher wages because increasing wages will push inflation higher.
King warned that house prices are unlikely to rise for another three to four years and said he does not rule out the possibility of a recession in the UK.
He said he is not surprised that many mortgage lenders have failed to pass on interest rate cuts to borrowers as many did not increase their rates in line with the interest rate rises of the summer.