Bank deputy governor says MPC can do nothing about inflation spike

The Bank of England admitted yesterday that there was "nothing the Monetary Policy Committee can do" about higher inflation. Rachel Lomax, a Deputy Governor of the Bank, echoed previous warnings from Mervyn King, the Governor, and other colleagues on the MPC that the CPI may well exceed the 3 per cent figure that would trigger a letter of explanation from Mr King to the Chancellor, Alistair Darling.

Ms Lomax explained: "From next month CPI inflation is likely to rise more sharply, in particular reflecting the impact of higher utility bills. There is essentially nothing the MPC can do about this immediate impact on the inflation rate... We are not required to raise interest rates sharply to counteract the rise in inflation which we expect over the next few months. And the purpose of the Open Letter regime is to give us an opportunity to explain how we propose to use our discretion."

Despite the efforts by the Bank to massage expectations, the prospect of inflation exceeding the Government's target by more than 1 per cent for the second time in a year and a half is likely to increase tensions with the Treasury. As recently as the G7 summit in Tokyo Mr Darling refused to countenance the possibility that the Governor would need to send another missive to No 11, and confined himself to saying that the UK outlook for inflation was "good" and that the MPC would "do its duty" to keep inflation under control. Yesterday he said that the UK faced "uncertain times", but "I believe we will get through this turbulence. And we must maintain confidence because the global economy, particularly to developing markets remains strong."

Ms Lomax was also keen to stress that "financial stress will act as a significant drag on demand over the next two years. But there is a high level of uncertainty about this and ... the risks, as they affect output, are tilted to the downside...There have been financial and banking crises before, but not on the present global scale, and this must surely be the largest ever peacetime liquidity crisis".

There was also more evidence of a gradual easing in growth in the CBI Distributive Trades Survey. It showed that more retailers had seen a sales fall this month than those experiencing an increase. The figures imply a decline in the annual growth rate of sales from 5.6 per cent to about 2.5 per cent. Even so, the index of prices that retailers expect to charge is running at its strongest level since 1996. Consumer inflation expectations are also running relatively high, though the latest Citigroup/YouGov survey eased slightly this month, with the average expectation over the next year at 3.1 per cent, down from 3.3 per cent in January.

Paul Dales, UK economist at Capital Economics, commented: "The MPC may have to let activity on the high street slow very sharply in order to keep inflation at bay – a message underlined by Rachel Lomax."