King Says Raising Interest Rate to Make a Gesture Would Be Self-Defeating
Bank of England Governor Mervyn King
Chris Ratcliife/Bloomberg
Bank of England Governor Mervyn King.
Bank of England Governor Mervyn King. Photographer: Chris Ratcliife/Bloomberg
Bank of England Governor Mervyn King said increasing the benchmark interest rate to make a gesture in the fight against inflation would be “self-defeating,” as he predicted above-target price gains will persist through 2011.
“To raise interest rates just to make a signal, a gesture is self-defeating,” King told lawmakers in London today. It would “undermine the whole point of this framework,” he added.
Central bank officials split four ways on policy last month amid differences on the outlook for inflation after consumer prices rose an annual 4 percent in January, double the bank’s target. King said today there was no evidence that businesses and households think high inflation is here to stay.
“I don’t believe we’ve yet seen significant evidence of a pickup in medium-term inflation expectations,” he told Parliament’s cross-party Treasury Committee. Still, it’s “reasonable to believe that if we continue to experience above- target inflation for long enough there could be an upside risk to inflation expectations.”
The pound fell 0.2 percent today and traded at $1.6266 at 15:33 p.m. in London. The yield on two-year government bonds climbed 1 basis point to 1.39 percent.
The nine-member Monetary Policy Committee last month kept the benchmark rate at a record low of 0.5 percent and its bond- buying program at 200 billion pounds ($326 billion).
Policy Split
Policy maker Andrew Sentance said that a half-point rate increase was needed, while Chief Economist Spencer Dale and Martin Weale argued for a quarter-point increase, minutes of the meeting showed. Adam Posen maintained a push to increase bond purchases.
In its quarterly Inflation Report last month, the Bank of England said its central projection was for inflation to peak at 4.5 percent in the third quarter and slow to below 3 percent, the upper limit of the target, in the first three months of 2012.
King said today a decline in the pound, along with higher energy and food costs, spurred price increases. Sterling has fallen about 24 percent on a trade-weighted basis since the start of 2007, making imports more expensive. Oil prices have risen above $100 a barrel and in the past 12 months corn has jumped 92 percent while wheat gained 62 percent.
Policy makers’ quarterly economic forecasts published last month assumed oil prices would be “broadly flat,” though they’ve risen since, King said. The path for costs isn’t clear, and that muddies the outlook for inflation.
Middle East
“An awful lot will hinge on how far this rise in oil prices persists, or whether as the political situation in the Middle East begins to become clarified it falls back again,” he said. “These are very uncertain factors and these are the things that do move inflation around.”
King said inflation may be tempered by the squeeze on the economy from government budget cuts. That view was supported by the European Commission, which today lowered its forecast for U.K. growth in 2011 to 2 percent from 2.2 percent in November and said it expects inflation to subside later this year.
“There will be a choppy recovery,” King said. “We’re expecting the recovery to continue,” he added, though “not at a particularly exciting rate.”
Above-target inflation forced King to write his fifth consecutive letter of explanation to Chancellor of the Exchequer George Osborne last month and he may need to write more “through the rest of this year,” he said. He also said there’s no agreement between them to keep the key rate low to offset the fiscal squeeze.
“That kind of conversation has never taken place,” he said. “I’m confident he’s not trying to hint to the Monetary Policy Committee about what we should and should not do.”
To contact the reporters on this story: Jennifer Ryan in London at jryan13@bloomberg.net; Svenja O’Donnell in London at sodonnell@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
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