Bank Governor warns that inflation risk could scupper rate cuts

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The Independent Online

Mervyn King, the Governor of the Bank of England, last night moved to stem mounting speculation of a cut in interest rates, using a keynote speech to highlight the risks to the inflation target.

Mervyn King, the Governor of the Bank of England, last night moved to stem mounting speculation of a cut in interest rates, using a keynote speech to highlight the risks to the inflation target.

Mr King told business leaders there was one downside risk to activity - consumer spending - but three upside risks to inflation from money growth, import prices and labour costs.

His comments came as a batch of figures appeared to show there was no sign of inflation from the housing market or factory floor with prices of houses and manufactured goods falling last month.

In a wide-ranging speech on globalisation, Mr King said its impact on monetary policy in the high street, spending and wages had started "to unwind".

He said cheap imports had kept high street prices low in the past, boosting spending, while migrant labour had quelled inflationary pressures in the labour market. But he said over the past few years the improvement in the UK's terms of trade had been less marked while real income growth had slowed.

Mr King said: "It is possible that we are seeing a temporary slowdown in spending on goods such as households goods, cars and clothes as households come to terms with the prospect of somewhat lower income growth."

He said this presented the one downside to risk to activity, if weakness spread to services making the fall in overall spending more protracted. "But there are also upside risks to inflation," he said. "Broad money is rising in real terms more rapidly than at point since 1997 which represents an upside risk to domestic demand.

"Second the downward pressure on inflation from falls in import prices may have come to an end. There is a risk that import prices will continue to put upward pressure on inflation.

"Lastly, the risks to labour costs seem to be on the upside," he said. "There is a risk that the effect of migrant labour on wage costs may diminish if the inflows represented a one-off adjustment."

There was little sign of inflationary pressures from the data. The average price of a home fell 0.8 per cent in March, halving the annual rate of inflation to 6.7 per cent, the Office of the Deputy Prime Minister said.

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