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It would have been wrong to raise rates, says King

Bank of England governor Mervyn King has defended the decision not to raise interest rates and says the sustained run of inflation is due to temporary shocks.
Giving evidence to the Treasury select committee last week, Mervyn King said those shocks include exchange rate changes, rises in commodity prices and VAT increases.

King said: “It would have been wrong to raise interest rates markedly over the past year deliberately in order to create a deeper recession to bring down inflation, which was the result primarily of what we believe to be temporary shocks.”

Monetary policy committee external member Andrew Sentence said: “My concern is not that it is inappropriate at times when you get one-off shocks to inflation to allow those to feed through and inflation to go back to target, but we have had this happening on a persistent basis.”

There was also criticism of a paragraph in May’s inflation report, released just after the general election, calling for “a more detailed and demanding path of significant fiscal consolidation” than provided by Labour’s March Budget.

MPC external member Adam Posen said: “Myself plus at least one other committee member were concerned that statement could be seen as excessively political in the context of the election.”

King responded: “What the inflation report says is always a view of the majority round the table. All nine members are asked whether they approve of the wording and the majority clearly agreed that.”

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