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.

PROMOTED VIDEO
Arts and Entertainment
Sheeran arrives at the 56th annual Grammy Awards earlier this year
musicYes, that would be Ed Sheeran, according to the BBC
Arts and Entertainment
AKB48 perform during one of their daily concerts at Tokyo’s Akihabara theatre
musicJapan's AKB48 are one of the world’s most-successful pop acts
News
Ian Thorpe has thanked his supporters after the athlete said in an interview that he is gay
people
News
The headstone of jazz great Miles Davis at Woodlawn Cemetery in New York
news
Arts and Entertainment
Brendan O'Carroll has brought out his female alter-ego Agnes Brown for Mrs Brown's Boys D'Movie
filmComedy holds its place at top of the UK box office
News
newsBear sweltering in zoo that reaches temperatures of 40 degrees
Arts and Entertainment
Professor Kathy Willis will showcase plants from the Royal Botanic Gardens at Kew
radioPlants: From Roots to Riches has been two years in the making
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Arts and Entertainment
TV The follow-up documentary that has got locals worried
Arts and Entertainment
Eminem's daughter Hailie has graduated from high school
music
Arts and Entertainment
Original Netflix series such as Orange Is The New Black are to benefit from a 'substantial' increase in investment
TVHoax announcement had caused outrage
Life and Style
Swimsuit, £245, by Agent Provocateur
fashion

Diving in at the deep end is no excuse for shirking the style stakes

News
One Direction star Harry Styles who says he has no plans to follow his pal Cara Delevingne down the catwalk.
peopleManagement confirms rumours singer is going it alone are false
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Information Security Manager (ISO 27001, Accreditation, ITIL)

£70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

Biztalk - outstanding opportunity

£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

Trade Desk Specialist (FIX, Linux, Windows, Network Security)

£60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

£35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

Day In a Page

Super Mario crushes the Messi dream as Germany win the 2014 World Cup in Brazil

Super Mario crushes the Messi dream

Germany win the 2014 World Cup in Brazil
Saharan remains may be evidence of the first race war, 13,000 years ago

The first race war, 13,000 years ago?

Saharan remains may be evidence of oldest large-scale armed conflict
Scientists find early warning system for Alzheimer’s

Scientists find early warning system for Alzheimer’s

Researchers hope eye tests can spot ‘biomarkers’ of the disease
Sex, controversy and schoolgirl schtick

Meet Japan's AKB48

Pop, sex and schoolgirl schtick make for controversial success
Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

How Saudi Arabia helped Isis take over northern Iraq

A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

The evolution of Andy Serkis

First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

You thought 'Benefits Street' was controversial...

Follow-up documentary 'Immigrant Street' has got locals worried
Refugee children from Central America let down by Washington's high ideals

Refugee children let down by Washington's high ideals

Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
Children's books are too white, says Laureate

Children's books are too white, says Laureate

Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
Blackest is the new black: Scientists have developed a material so dark that you can't see it...

Blackest is the new black

Scientists have developed a material so dark that you can't see it...
Matthew Barzun: America's diplomatic dude

Matthew Barzun: America's diplomatic dude

The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

Meet the 'Quantified Selfers'

From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

Five-star reviews are just the opening act for British theatre's first non-white artistic director

Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
Mrs Brown and her boys: are they having a laugh?

Mrs Brown and her boys: are they having a laugh?

When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor