Bank to Put Interest Rates on Hold in Fight against Inflation; ECONOMICS
Byline: By Nevill Boyd Maunsell Economics Editor
Mervyn King, governor of the Bank of England, set the stock market ablaze yesterday - albeit briefly - with what was interpreted as an indication that the Bank may not raise interest rates this year after all.
Nervous City markets had been pointing to at least one quarter-point rise increase in the cost of borrowing as inflation ran well ahead of the Bank's two per cent target.
Instead, Mr King pointed out that the economic slowdown the Bank's interest-setting monetary policy committee believes is necessary to bring inflation back to the target is "already in train".
The stock market, deeply depressed last week, shot ahead, driving the 100-share FTSE Index 120 points higher at one stage, though it later settled back to finish 67.3 points to the good at 5861.9.
Mr King was writing in an open letter to Chancellor Alistair Darling explaining why inflation of 3.3 per cent over the year to May has broken more than a full percentage point above the target. That was up from three per cent in April, after prices as measured by the Consumer Price Index had jumped by 0.65 per cent in a single month.
He warned that inflation is set to rise sharply in the second half of this year, to above four per cent. Despite that, the Bank's committee is looking to its "normal forecast horizon of around two years" to get it back to the target. "There are good reasons to expect the period of above-target inflation we are experiencing now to be temporary," he wrote.
"It is possible that commodity prices will rise further in the coming months," he wrote. "Oil prices have now been rising for four years.
"But in the absence of further unexpected increases in oil and commodity prices, inflation should peak around the end of the year and begin to fall back towards the two per cent target."
But Mr King also warned "Inflation is likely to remain markedly above the target until well into 2009. I expect, therefore that this will be the first of a sequence of open letters over the next year or so. …