King hints at higher rates as inflation falls to just 1.1%

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The Independent Online

It is too early to state that interest rates have peaked, the Governor of the Bank of England said in an interview published today.

It is too early to state that interest rates have peaked, the Governor of the Bank of England said in an interview published today.

"It is not fair to say that they have peaked because I don't know where interest rates will go, nor does anybody else," Mervyn King told a regional newspaper. "The monetary policy committee has not made up its mind and I would like to reassure everyone that we don't have any predetermined plans for interest rates."

His remarks, in an interview with the Western Morning News, came just hours after he told business leaders the next move in rates was hanging in the balance. Mr King said while the recent fall in the pound could boost inflation, surging oil prices could have the opposite effect by slowing the economy.

"Looking ahead, the monetary policy committee will have to balance the impact on inflation of the evidence of weaker activity against the fall in sterling and other signs of cost pressures," he said at a dinner in the Eden Project in Cornwall.

Mr King said surging oil prices had "moderated" the outlook for the world economy. "There are some signs that the economy is experiencing a softer patch after rapid growth in the first half of the year," he said.

On the other the hand, he said there had been a "significant" fall in sterling - usually seen as inflationary via higher import prices - and continuing rapid expansion in consumer borrowing.

Looking further ahead, Mr King said the era of low inflation and falling unemployment the UK had enjoyed over the last 10 years was likely to end.

He said the non-inflationary, consistently expansionary decade was likely to be followed by years of greater volatility. "The combination of low and stable inflation and continuously falling unemployment must come to an end at some point, may already have done so," he said.

The Office for National Statistics said yesterday the inflation measure the Bank targets slowed to 1.1 per cent from 1.3 per cent, confounding forecasts of 1.4 per cent. If inflation falls to 0.9 per cent, Mr King must write an open letter explaining why it is so far adrift of the 2.0 per cent target - making it harder to impose a rate hike.

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