Oil spike may force rate rise, Bank deputy warns
Thursday 03 February 2011
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.
- 1 Al Pacino on suffering from depression: 'It can last and it's terrifying'
- 2 Half of young women unable to ‘locate vagina’ and 65% find it difficult to say the word
- 3 Saudis risk new Muslim division with proposal to move Mohamed’s tomb
- 4 A teacher speaks out: 'I'm effectively being forced out of a career that I wanted to love'
- 5 Mexican woman becomes world’s 'oldest person' at 127
Perez Hilton apologises for publishing Jennifer Lawrence naked photo leak
Jennifer Lawrence 'nude photo hacker' claims there are hundreds more celebrity images to come
Victoria Justice on naked photo leak: 'Let me nip this in the bud right now – pun intended'
Saudis risk new Muslim division with proposal to move Mohamed’s tomb
Ariana Grande nude photos leak: Pictures are completely fake, say representatives
Rotherham child sex abuse scandal: Labour Home Office to be probed over what Tony Blair's government knew - and when
What do immigrants really think of Britain? Polish immigrant's Reddit post goes viral
Ashya King: Parents of five-year-old boy refused permission to visit him in hospital and denied bail at Spanish court
With Douglas Carswell joining Ukip, my party has taken another giant step forward
When elitism grips the top of British society to this extent, there is only one answer: abolish private schools
Ashya King: 'Cruel NHS has not given us the treatment we need', says father of five-year-old with brain tumour who fled to Spain
iJobs Money & Business
£35000 - £38000 per annum + benefits: Ashdown Group: Executive Assistant/Event...
£30000 - £32000 per annum: Ashdown Group: HR Generalist (standalone) - Tunbrid...
£600 - £800 per day: Harrington Starr: Derivatives Risk Commodities Business A...
£600 - £800 per day: Harrington Starr: Power & Gas Business Analyst/Subject Ma...