Bank of England governor dampens rate cut hopes
Tuesday, 01 Apr 2008 13:51
Bank of England governor warns inflation must be kept down
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Bank of England governor Mervyn King dampened hopes of a rate cut next week with comments made in a speech emphasising a central bank's role in keeping down inflation.
"We face a difficult balancing act," said Mr King during a speech in Jerusalem.
Mr King reiterated the Bank of England's (BoE) February prediction that inflation is set to rise further, to three per cent, before returning to the government-set target of two per cent.
"In judging how far inflation is likely to fall back next year, we have to gauge the extent to which high inflation in the short term will enter the expectations of those setting prices and pay.
If it does so, then without some margin of spare capacity, inflation will have some tendency to persist above the target," Mr King said.
The BoE governor added that once higher inflation becomes entrenched, it can be costly to dislodge and warned past UK recessions were associated not with slowdowns in the world economy, but with attempts to squeeze inflation out of the UK economy.
However, Mr King added "even though some slowdown in the growth rate of economic activity is likely to be necessary to ensure that inflation returns to the target, we cannot allow the economy to slow too sharply," offering a glimmer of hope to those hoping for an interest rate cut next week.
The monetary policy committee, which meets on the 9th and 10th April to set the interest rate for the month, made it clear from the last meeting that rising inflation was high on their agenda.
The majority vote was for the rate to stay the same at 5.25 per cent, despite pressure to drop the rate again to ease the credit crunch.