Launch of new inflation target delayed to next year

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The Independent Online

Gordon Brown will unveil his keynote pre-Budget report in the second week of December, delaying the official launch of a European-style inflation system until next year.

The Chancellor is expected to publish his report on 9 or 10 December. Its release will herald a switch in the way the Bank of England targets inflation.

Analysts said a delay to the changeover might encourage the Bank to lift rates sooner - possibly before Christmas.

Mr Brown will announce that the Bank must target the harmonised index of consumer prices (HICP), now used across the euro area, rather than the existing retail price index excluding mortgage costs (RPIX).

He will also announce the new target rate, which will have a significant bearing on interest rates.

It is understood the new target will take effect at the following meeting of the Monetary Policy Committee rather than being delayed to allow the two measures to run side-by-side.

The MPC now targets an RPIX rate of 2.5 per cent over a two-year horizon but is expected to be asked to hit a 2 per cent rate under HICP.

The main difference between the two measures is that HICP makes no attempt to include housing costs. The current housing boom is one reason why RPIX is running at twice the pace of HICP - 2.8 versus 1.4 per cent. The Bank of England's Governor Mervyn King has expressed disquiet at the timing, describing the change as "moving the goalposts" and hinting that he would prefer it to be delayed until the gap has narrowed.

This had led to speculation that the Bank would be told to start hitting the HICP target rate in a couple of years' time.

But Whitehall sources say Mr Brown laid out the timing explicitly in April's Budget when he said that "subject to confirmation at the time of the PBR I intend to change the inflation target at that time".

Ray Attrill, a director of research at the online analysis firm 4CAST, said that could bring forward the three rate rises he expects between now and February.

"The Bank would prefer not to be changing policy in the middle of this, so if the switch were not to come until January that makes it easier to visualise a rise in November and December," he said.

However, the most important factor will be the new target. Adam Law, UK economist at Barclays Capital, believes it will be set at 2 per cent.

Given that 2.5 per cent under RPIX was equivalent to 1.7 per cent under HCIP, he said a 2 per cent target implied that rates would stay lower than they would have done under RPIX.

While the Monetary Policy Committee's decision will be made on 4 December, the minutes revealing its reasoning will not be published until after the PBR on 17 December.

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