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.