King Called to Task as Lawmakers Heed Inflation Fears
U.K. lawmakers who scrutinize Bank of England officials including Governor Mervyn King said they’re concerned about accelerating price gains and want reassurance the central bank isn’t losing control of inflation.
“This is a big test for them now and they need to weather this to ensure that credibility is maintained,” John Thurso, a Liberal Democrat member of the British Parliament’s Treasury Committee, said in an interview in London yesterday. “I’m looking for reassurance” that “we’re not just quietly abandoning the inflation target.”
U.K. price growth soared in December and economists forecast it may accelerate again this month after an increase in sales tax. King is due to face the committee after the bank publishes new forecasts in February, and lawmakers are stepping up public pressure on him to justify why policy makers are holding the key interest rate at a record low after inflation exceeded the bank’s 2 percent target for more than a year.
“My constituents are writing to me -- this is the one big thing in my mailbag,” Treasury Committee member Mark Garnier, a lawmaker in the ruling Conservative Party based in England’s Midlands, said of inflation. “It’s especially a problem outside London where people rely on their cars to move around.”
Consumer prices rose an annual 3.7 percent last month, driven by fuel and food costs, data showed yesterday, exceeding the 3.4 percent median forecast of 31 economists in a Bloomberg News survey. On the month, prices jumped a record 1 percent.
A decision by King and his colleagues on the bank’s Monetary Policy Committee to change tack and raise the interest rate might make life difficult for Prime Minister David Cameron and his plan to cut the record budget deficit. Higher borrowing costs may put an additional restraint on economic growth just as spending cuts by the governing coalition of Conservatives and Liberal Democrats start to bite.
As the dilemma weighs on the outlook for Britain’s recovery, the pound has weakened. Sterling has declined against 13 of the 16-most traded currencies in the last six months. Gilts have lost 3.37 percent on average the past three months, exceeding losses of 2.77 percent for U.S. Treasuries and 2.68 percent for German bunds, Bank of America Merrill Lynch index data show.
“The recovery has enough problems with the spending cuts and growing unemployment,” said Treasury Committee member George Mudie from the opposition Labour Party. “If the MPC lost its nerve at this moment, I really think that would be the final straw. We would be in danger of going back into recession.”
Andrew Tyrie, chairman of the Treasury committee and a Conservative lawmaker, said the pickup in inflation is a “source of concern” and policy makers’ decisions will be “subject to full scrutiny.” Fellow Tory committee member Michael Fallon said this week that officials should start a series of “gradual” rate increases now to avoid sharper moves later.
King told the panel at his last appearance in November that inflation, which has exceeded the government’s 3 percent limit for 10 months, will remain “elevated for another year or so,” though taking “strong action” risked destabilizing the economy. He has also said the bank’s “central view” is that slack in the economy will put ‘downward pressure on inflation.”
Economists at Investec Securities and Ernst & Young LLP’s Item Club say inflation may accelerate to 4 percent after the government increased value-added tax to 20 percent from 17.5 percent on Jan. 4. A report by Aviva Plc published today showed that increasing costs is the biggest fear among 57 percent of U.K. households.
The debate among Bank of England officials is whether price gains pose a greater danger to the economy than the government’s budget squeeze, the biggest since World War II. They have split three ways on policy since October.
The central bank held the benchmark interest rate at 0.5 percent last week and the emergency bond-purchase plan at 200 billion pounds ($319 billion). Minutes of the decision will be published next week.
Investors are betting on a pick-up in inflation. The yield gap between five-year U.K. inflation-linked bonds and standard notes of similar maturity, a gauge of market expectations of price growth known as a breakeven rate, held at 2.74 percentage points today from yesterday. The rate has risen from 2.53 percentage points Jan. 1.
Bank of England Markets Director Paul Fisher said in an interview published yesterday in the Yorkshire Post newspaper that inflation is “very uncomfortable,” though it will probably peak in the first three months of 2011.
Cameron, who has described recent price gains as “concerning,” has confidence in the bank’s ability to tame inflation, his spokesman Steve Field said. Monetary policy is “very clearly” a matter for the central bank, Field said.
“To some extent, they’re between a rock and a hard place and I don’t envy their task,” Thurso said. “If inflation drops back, that’s that. If on the other hand it does not, then I think the MPC will be obliged to come to the conclusion that rises in interest rates are necessary.”
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