Oil spike may force rate rise, Bank deputy warns

The Bank of England may be forced to raise interest rates if commodity prices continue to rise, the deputy governor, Charles Bean, has warned.

The official line from the Bank's rate-setting Monetary Policy Committee (MPC), of which Mr Bean is a member, is that Britain's economic recovery is too fragile to withstand a rise in interest rates. Inflation running at 3.7 per cent in December and set to go higher will come back down to the 2 per cent target in 2012, the Bank says.

But in the face of global pressures, including rising food prices, metals and other commodities at record highs, and oil breaking through the $100 mark in response to concerns over stability in the Middle East, the MPC may be forced to raise rates regardless of the danger to the nascent recovery. "We may well have to respond to that by keeping domestically generated inflation lower," Mr Bean said in an interview with the Western Mail, a Cardiff newspaper.

The impact of a rate rise will depend on the situation in the wider economy, he said. "Whether it dents confidence depends on why it happens – if we raise rates because the economy is growing quite strongly and the recovery is entrenched then that's a 'nice' rise," Mr Bean said. "On the other hand if it is in response to a spike in oil prices that we think is likely to persist and inflation is becoming embedded, that's not a nice reason to raise interest rates, but we would have to do it."

Mr Bean's comments will add further grist to the debate at next week's MPC meeting. The group's newest member, Martin Weale, has already added his voice to that of Andrew Sentance – a long-term interest rate hawk – calling for rates to rise by a quarter of a point to 0.75 per cent to maintain the Bank's credibility as an inflation fighter. Meanwhile Adam Posen has called repeatedly for a further tranche of quantitative easing to prop up the stuttering recovery.

Mervyn King, the Bank's Governor, last week stressed with unusual candour the danger of raising rates before the economic recovery is strong enough to withstand the drag. And surprise figures showing UK GDP contracting by 0.5 per cent in the fourth quarter of 2010 give weight to Mr King's case. Even if the effects of the cold snap are discounted, growth was still only "flattish", experts say.

But the latest economic survey of the construction sector, published yesterday, adds to the evidence of a "two-speed" recovery to challenge the MPC policymakers.

The closely watched construction sector purchasing managers' index (PMI) jumped to 53.7 in January, from 49.1 in December, where a reading above 50 indicates growth. And new orders growth and business expectations climbed to a six-month andeight-month high respectively, says the survey compiled by Markit andthe Chartered Institute of Purchasing and Supply.

But economists warned that the index is still well below the level reached last spring, and at least part of the surge is the result of the cold weather that dragged activity down in December.

To add to inflation fears, construction groups also report spiking input prices. And the manufacturing PMI released earlier in the week reported record levels of activity and also record levels of input price inflation.

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

SThree: Talent Acquisition Consultant

£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

Recruitment Genius: Experienced Financial Advisers and Paraplanners

Negotiable: Recruitment Genius: This extremely successful and well-established...

Guru Careers: FX Trader / Risk Manager

Competitive with monthly bonus: Guru Careers: We are seeking an experienced FX...

Day In a Page

Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

Making of a killer

What motivated a shy student to kill 38 holidaymakers in Tunisia?
Ajmer: The ancient Indian metropolis chosen to be a 'smart city' where residents would just be happy to have power and running water

Residents just want water and power in a city chosen to be a ‘smart’ metropolis

The Indian Government has launched an ambitious plan to transform 100 of its crumbling cities
How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

How to stop an asteroid hitting Earth

Would people cooperate to face a global peril?
Just one day to find €1.6bn: Greece edges nearer euro exit

One day to find €1.6bn

Greece is edging inexorably towards an exit from the euro
New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

'Iron Man' augmented reality technology could become reality

Holographic projections would provide extra information on objects in a person's visual field in real time
Sugary drinks 'are killing 184,000 adults around the world every year'

Sugary drinks are killing 184,000 adults around the world every year

The drinks that should be eliminated from people's diets
Pride of Place: Historians map out untold LGBT histories of locations throughout UK

Historians map out untold LGBT histories

Public are being asked to help improve the map
Lionel, Patti, Burt and The Who rock Glasto

Lionel, Patti, Burt and The Who rock Glasto

This was the year of 24-carat Golden Oldies
Paris Fashion Week

Paris Fashion Week

Thom Browne's scarecrows offer a rare beacon in commercial offerings
A year of the caliphate:

Isis, a year of the caliphate

Who can defeat the so-called 'Islamic State' – and how?
Marks and Spencer: Can a new team of designers put the spark back into the high-street brand?

Marks and Spencer

Can a new team of designers put the spark back into the high-street brand?
'We haven't invaded France': Italy's Prime Minister 'reclaims' Europe's highest peak

'We haven't invaded France'

Italy's Prime Minister 'reclaims' Europe's highest peak
Isis in Kobani: Why we ignore the worst of the massacres

Why do we ignore the worst of the massacres?

The West’s determination not to offend its Sunni allies helps Isis and puts us all at risk, says Patrick Cockburn
7/7 bombings 10 years on: Four emergency workers who saved lives recall the shocking day that 52 people were killed

Remembering 7/7 ten years on

Four emergency workers recall their memories of that day – and reveal how it's affected them ever since
Humans: Are the scientists developing robots in danger of replicating the hit Channel 4 drama?

They’re here to help

We want robots to do our drudge work, and to look enough like us for comfort. But are the scientists developing artificial intelligence in danger of replicating the TV drama Humans?