Bank issues 5 per cent inflation warning
Wednesday 23 March 2011
Inflation is at significant risk of pushing past 5% in the coming months, policymakers at the Bank of England warned today as surging oil prices triggered by violence in North Africa add pressure to the cost of living in the UK.
March minutes of the Bank's Monetary Policy Committee (MPC) meeting showed members voted six to three in favour of holding rates at their historic low of 0.5% - but said the case for a hike had strengthened.
As the rate of inflation increases, hitting 4.4% in February, rate-setters fear the shock decline in the UK economy at the end of last year may not have been temporary as consumers continued to tighten their belts.
The Bank has been battling with inflation well above its 2% target in recent months but has insisted pressure is coming from temporary price shocks such as rising food and oil prices.
But the committee conceded for the first time in the March minutes that inflation could top 5% in the coming months, while members also raised concerns over the heightened political tensions in North Africa and the Middle East and the stranglehold the troubles could have on oil supply.
Oil prices have rocketed since the crisis in Libya began to unfold, with Brent crude in London currently 115 US dollars a barrel and crude oil for May delivery at 105 US dollars a barrel on the New York Mercantile Exchange.
The minutes said: "A substantial development during the month had been the increase in oil prices reflecting heightened political tension in the Middle East and North Africa and its possible impact on oil supply."
The committee went on: "Unless the increase in the oil price quickly reversed, it would very likely lead inflation in the near term to rise further above the target than previously expected."
The voting position of the nine-strong committee was unchanged this month with Andrew Sentance voting in favour of a 0.5% increase, Martin Weale and Spencer Dale backing a 0.25% rise and Adam Posen reiterating his vote for a second bout of quantitative easing. The remainder voted for no change in policy.
The majority were still minded to wait and see how the economy has fared in the first quarter of this year before altering their stance, the minutes added. This follows an unexpected 0.6% decline in GDP in the final three months of 2010.
The MPC said: "While the recent information on the prospects for UK net trade had been encouraging, it was not yet clear that the weakness in output growth seen in the latter part of 2010 would prove temporary, particularly in light of the latest indicators of a further weakening in consumer spending."
Economists said the minutes cast doubt over the timing of a potential interest rate hike - with many expecting the first rise to be in May.
Howard Archer, chief European and UK economist for IHS Global Insight, said: "Latest developments do little to clear the fog surrounding exactly when interest rates will start to rise.
"Indeed, the minutes concluded that recent developments had increased the uncertainty over both the growth and inflation outlooks, with higher oil prices from events in the Middle East and Africa adding both to near-term upside inflation and downside growth risks."
He went on: "The case for holding fire on interest rates for now is supported by ongoing serious uncertainties and concerns about the underlying strength of the UK economy and its ability to withstand the increasing fiscal squeeze. Signs that consumers are currently reining in their spending is a particular concern."
Vicky Redwood, senior UK economist at Capital Economics, said the earthquake in Japan, which occurred after the last meeting, was likely to add further uncertainty to the global outlook.
She added: "While a near-term rate rise is certainly still a big risk, we remain of the view that it is not the done deal markets think."
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