U.K. inflation probably accelerated to a two-year high last month, forcing Bank of England Governor Mervyn King to publish a letter in the first of two public defenses this week of the bank’s record-low interest rates.
Annual consumer-price growth probably accelerated to 4 percent in January, the fastest since November 2008 and double the central bank’s target, according to the median forecast of 30 economists in a Bloomberg News survey. That will force King to write to Chancellor of the Exchequer George Osborne and explain the bank’s policy, a day before he presents his new quarterly economic forecasts in London.
King’s argument that the current bout of inflation is temporary has been challenged by two members of the bank’s Monetary Policy Committee, who are pushing for higher interest rates. The combination of tighter monetary policy at a time of government spending cuts is “potentially very difficult,” Business Secretary Vince Cable said in a Bloomberg Television interview broadcast this week.
“My guess is that King will continue to chant the mantra that the factors driving inflation right now are beyond the bank’s control,” Peter Dixon, an economist at Commerzbank AG in London, said in a telephone interview yesterday. “That is correct, but it doesn’t necessarily mean that they can afford to sit on the sidelines forever.”
The pound slipped 0.2 percent against the dollar today and traded at $1.6014 as of 7:58 a.m. in London. It’s gained 2.6 percent this year.
The Office for National Statistics in London will publish the data at 9:30 a.m. The central bank may release King’s fifth consecutive inflation letter an hour later as well as any written response from Osborne.
The governor must write to the chancellor every three months when the inflation rate strays more than a percentage point from the 2 percent target in either direction. In the first of the current series of letters a year ago, King said that quickening inflation was expected by policy makers “to be a temporary deviation” from the goal.
With price gains showing little sign of abating since then, partly due to the government’s sales-tax increase, the central bank held its key interest rate at a record low of 0.5 percent this month. Former policy maker DeAnne Julius said last week the bank faces a “credibility problem.”
“I think King will put the same case across that he has done pretty consistently for the last year or two, the story of one-off shocks,” said Philip Rush, an economist at Nomura International Plc in London. “That’s not necessarily going to be effective at satisfying his critics, but that is the state of the communications challenge faced by the bank.”
The combination of persistent inflation and the fiscal squeeze has widened the debate among policy makers about when to withdraw stimulus. While Andrew Sentance and Martin Weale voted in January for a 25-basis-point increase in the key rate to tame price gains, according to the minutes of that meeting, Adam Posen maintained his call for an expansion of the bank’s 200 billion-pound ($320 billion) bond-purchase plan. The minutes of this month’s meeting will be published Feb. 23.
U.K. inflation has accelerated even after the economy shrank 0.5 percent in the fourth quarter as food, oil and other commodity costs rose and the government increased value-added tax as part of measures to rein in the budget deficit.
Investors have increased bets on a rate increase, with the yield on short-sterling futures expiring in June rising 24 basis points to 1.14 percent this year.
Marks & Spencer Group Plc, the U.K.’s largest clothing retailer, said last month that trading conditions may become more challenging on increased commodity prices and as consumers’ incomes are pressured by higher taxes and spending cuts.
In a sign of building inflation pressures, input prices at factories rose an annual 13.4 percent in January, the most in more than two years. At the same time, Britons’ expectations for inflation for the next year rose to 3.6 percent last month, their highest level since 2008, Citigroup Inc. said on Jan. 28.
King will get a second opportunity to put forward his view at a press conference at 10:30 a.m. tomorrow when he publishes the bank’s new inflation outlook.
“I’m sure he is looking forward to this week,” said Commerzbank’s Dixon. “He’s a combative individual. This is the kind of cut and thrust which he relishes. I’m sure he’ll be very happy to give a very strong message this week.”