UK CPI rises, BoE ready to act in either direction

LONDON - British inflation unexpectedly rose further above its target in October but the Bank of England said it was ready to change policy in either direction as the risks to the outlook were substantial on both sides.

By (Reuters)

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Published: Tue 16 Nov 2010, 6:00 PM

Last updated: Mon 6 Apr 2015, 11:26 AM

The Office for National Statistics said on Tuesday that annual consumer price inflation rose to 3.2 percent last month, more than a percentage point above the Bank’s 2 percent target. It has now exceeded 3 percent every month since March.

Analysts had expected it to stay at 3.1 percent and sterling shot up around half a cent against the dollar as traders bet the stubbornly high inflation figures meant the BoE’s Monetary Policy Committee will not pump more stimulus into the economy.

But Governor Mervyn King, forced by his remit to write a fourth letter of explanation this year as to why inflation is so high, said the rise was likely temporary and that spare capacity in the economy would bring the CPI rate down in the medium-term.

He said that while inflation would likely stay above target for the next year because of a planned VAT rise and higher commodity prices, monetary policy operated with lags and had to balance competing upside and downside risks to inflation.

“The committee is ready to adjust policy — in either direction — in order to ensure that the risks to the outlook in the medium-term remain evenly balance around the 2 percent target,” the letter said.

Finance minister George Osborne replied that he noted King’s points.

Balancing risks

The BoE left interest rates at a record low of 0.5 percent this month and kept its 200 billion pounds ($319 billion) quantitative easing programme on ice but the jury remains out on what the next move in policy will be.

The MPC was split 3 ways in October, with one member calling for a rate hike, another for a cut and the remaining seven for unchanged policy.

Minutes showing November’s voting record will be published on Wednesday. King and other BoE official are also due to testify to a parliamentary committee later on Tuesday.

Policymakers have been grappling with above-target inflation on one side, and on the other, the prospect of recovery from the worst recession since World War 2 being thrown off track by the global economy and planned fiscal tightening.

Analysts are also divided about whether rates will rise from their record low of 0.5 percent or if the BoE will follow the U.S. Federal Reserve and expand its quantitative easing.

“There is a non-negligible chance that inflation expectations get dislodged. Under these circumstances, it’s difficult to see the MPC embark on another round of quantitative easing,” said Amit Kara, economist at UBS.

But Peter Dixon, economist at Commerzbank countered: “The BoE really has to focus on growth at the moment given what’s going on in the rest of the world. They’ve ignored higher inflation this year and they can afford to do so for a considerable time to come.”

Projections published by the central bank last week showed inflation could rise above 3.5 percent at the start of next year — when a rise in VAT will kick in — but would fall back below 2 percent in early 2012.

Retail price inflation, which includes more housing costs and forms the basis of many wage deals, eased slightly to 4.5 percent last month from 4.6 percent in September.

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