King reveals 'real differences' at Bank over inflation

 

Bank of England Governor Mervyn King has admitted 'real differences' between MPC members on the direction for inflation in his letter to the Chancellor explaining above-target price rises.

Mervyn King and The Bank of England composite

King pin: The Bank governor admitted the MPC members held differing views.

Mr King was duty bound to write to Chancellor George Osborne after inflation by the official Consumer Price Index was confirmed at 4% in January.

In the letter, Mr King said: 'There is a great deal of uncertainty about the medium-term outlook for inflation. And I do not wish to conceal that there are real differences of view within the Committee, reflecting different judgements about the risks to that outlook.'

Mr King said that the Bank expects inflation to rise even further, to between 4% and 5% over the next few months, and that it may take as long as three years before it is brought back to target.

He said: 'The MPC's-central judgement, under the assumption that Bank Rate increases in line with market expectations, remains that, as the temporary effects of the factors wane, inflation will fall back so that it is about as likely to be above the target as below it two to three years ahead.'

Those 'temporary factors' include a higher rate of VAT, a weaker pound, which means British buyers have to spend more to get the same imported goods, and higher commodity (gas, electricity an petrol) prices.

The Bank has long-argued that these effects will ebb away and, coupled with an expected slowdown in the economy as public spending cuts take hold, this will pull inflation lower. However, the letter sent this week indicates that Monetary Policy Committee members now acknowledge the risk that higher prices may be here to stay.

Market Stall

More on rising inflation:

›› Inflation running at 2% above Bank target
›› January CPI at 4%: What the experts say

 

Mr King wrote: 'Members of the Committee hold differing views about the risks to inflation in the medium term. On the downside, the main risk is that the substantial margin of spare capacity will cause inflation to fall below target in the medium term.

'That risk could be exacerbated if growth in the economy is weaker than expected, for example if household saving is higher than expected.

'Opposing these downside risks, there are also significant upside risks to the medium-term outlook for inflation. The period of above-target outturns for inflation could cause inflation expectations to move up and thereby affect wage and price setting. And import price inflation could remain elevated.'

The governor added that the MPC stood ready to raise rates if the upward pressure on inflation increases.

He said: 'Every member of the Committee is conscious that there are large risks in both directions. And no one should be in any doubt that when the balance of risks requires it, every member of the Committee is determined to act to adjust policy in order to bring the risks back into balance.'

Following the granting of independence to the Bank of England in 1997, it has become a requirement of Bank governors to write to the Chancellor with an explanation if inflation veers more than one percentage point above or below its 2% target.