Bank of England in inflation dilemma
May 14, 2008
By Svenja O’Donnell
London - Britain's inflation rate jumped the most since 2002 last month, making it harder for the Bank of England to support economic growth by cutting interest rates.
Consumer prices climbed 3 percent from a year earlier, compared with 2.5 percent in March, the Office for National Statistics said yesterday. The figure was the highest in 13 months and exceeded the 2.6 percent prediction of 37 economists in a Bloomberg survey. The 0.5 percentage point increase from March was the biggest jump since July 2002.
Prices rose 0.8 percent month on month, the most in almost seven years.
"This puts the cat among the pigeons," said Trevor Williams, the chief economist at Lloyds TSB Group and a former British government economist. "Interest rate cuts are totally off the agenda. The underlying problem we face in the real economy is inflation."
Inflation has exceeded the Bank of England's 2 percent target for seven months. British law requires central bank governor Mervyn King to write a letter of explanation to the government if inflation strays more than 1 percentage point from the target. King said on April 29 that inflation was "likely" to reach the 3 percent limit and might exceed it.
The pound rose yesterday after the report showed that inflation, stoked by food and energy costs, was within 0.1 percentage point of the limit.
Policy makers have cut the benchmark interest rate three times since December to 5 percent to avert a recession as house prices fell. Yesterday a report showed the most widespread house price declines since at least 1978.
The consumer price index (CPI) figures come on top of Monday's announcement that producer prices rose 7.5 percent from a year earlier last month, the fastest since 1986.
Economists predicted before yesterday's report that the central bank would reduce rates further to nurture economic growth. The median forecast of 22 economists in a Bloomberg survey was for the bank to cut its rate to 4.25 percent by the end of this year.
Paul Donovan, an economist at UBS, said the bank would still cut rates because slowing growth would dampen inflation. "Inflation was always going to go above 3 percent," he told Bloomberg Television. "It will go higher. But the Bank of England isn't worried about inflation now; it's worried about inflation in the future."
Credit market turmoil led the International Monetary Fund to forecast UK growth of 1.6 percent this year, the least since the end of the last recession 16 years ago. But Williams said: "Despite the credit crunch, we are going to have to start thinking about upward risks to interest rates." He predicts that the central bank will avoid further rate cuts this year.
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