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KING ON SPOT AS INFLATION FUELS INTEREST RATE FEARS

Mervyn King must write an open letter to Chancellor Darling if inflation exceeded targets

Monday June 16,2008

By David Shand

BANK of England Governor Mervyn King will come under pressure this week to calm fears about possible rises in interest rates.

Soaring food and energy prices are expected to push the consumer price index (CPI) inflation measure for May through the 3 per cent barrier.

This will oblige King to write an open letter to Chancellor Alistair Darling, explaining why inflation has risen more than 1 per cent above the Government’s 2 per cent target and what he intends to do to bring it down.

The CPI report will be published tomorrow. Some observers believe the lack of any discussion about monetary policy in King’s speech to the British Bankers’ Association last week is an indication that inflation has gone above 3 per cent.

Markets have been awash with speculation during the past few days that, at the very least, the recent large rises in food, gas and electricity prices have dashed hopes of further interest rate cuts in the near future.

It is thought they might even prompt a rise in the base rate from the current 5 per cent.

Inflation has been on a steady upward curve since last August and it jumped 0.5 percentage points last month to 3 per cent — the biggest monthly rise for nearly six years.

Howard Archer, chief UK economist at financial analyst Global Insight, said the delicate balance between soaring inflation and Britain’s slowing economic growth would sharpen the focus on the minutes of the June meeting of the Bank’s Monetary Policy Committee, due to be released on Wednesday.

“The minutes may give a crucial insight into how the committee judges the balance of risks to the growth and inflation outlooks, particularly as it would have seen the sharply higher producer input and output inflation data for May,” Archer said.

“A key issue will be whether the MPC discussed the case for an interest rate hike as well as the case for a cut.”

Meanwhile, the Confederation of British Industry predicted the CPI would top 3 per cent for the rest of the year and warned rising commodity costs and faltering consumer demand would force down UK economic growth next year to its lowest level since 1992.

The employers’ group lowered its forecast for GDP growth in 2009 0.4 per cent to 1.3 per cent, with this year’s forecast down 0.1 per cent from March’s figure to 1.7 per cent.

It said high oil prices had made it much harder for the Bank of England to cut interest rates in the face of the economic slowdown.