Interest rate cut unlikely as Mervyn King explains sharp rise in inflation

As Mervyn King explains the 4.7 percent rise in inflation, all hopes of an early interest rate cut disappears. This comes as Chancellor Alistair Darling opened a letter from Mervyn King which explains why inflation is running at double the banks normal 2 percent target. It also stated in the letter from Mr King that the position has got worse since his previous letter in June.

As leaping food and utility prices overshadowed the decrease in oil prices, sending the inflation to rise to 4.7 percent in the year to August. However, the monetary policy committee who set the banks interest rate is expecting inflation to peak soon at around 5 percent, significantly higher than they first thought in June.

The governor wrote if they allow an increase in inflation to become embedded in expectations then a prolonged period of depressed activity and high unemployment is ultimately required to get inflation back down,” “And because the peak in [consumer price] inflation is expected to be higher than three months ago, the risk that it may have an effect on other prices and costs is now greater.

“For that reason, the committee has become firmer in its belief that a period of muted economic growth is necessary to dampen pressures on prices and wages and return inflation to the target.”
Pleas for him to relax the Bank’s target were rejected by the Chancellor in his reply.

Read the full article in the Birminghampost