Rising inflation expectations limit scope for interest rate cuts
Friday 14 March 2008
Latest in Business News
On Facebook
The Bank of England's feared scenario came closer yesterday when expectations of inflation rose to their highest level since 1999, limiting the scope for interest rate cuts to stimulate the economy.
The central bank's quarterly survey found that people's expectations for the rate of inflation over the next year were 3.3 per cent in February, more than a point above the current official rate and beating the previous high of 3 per cent in November.
The survey also showed people's perception of the current rate of inflation leapt to a record 3.9 per cent from 3.2 percent in November. Official figures showed consumer price inflation at 2.2 per cent in January, continuing a run of above-target rates that started in October.
Mervyn King, the Bank's Governor, has said he is prepared to let short-term spikes in food and energy prices keep inflation above the 2 per cent target as long as expectations of price rises do not become entrenched and start to shape behaviour.
The Bank's Monetary Policy Committee is trying to avoid a sharp slowdown in the economy without cutting rates so far that it unleashes inflation.
Alan Clarke, UK economist at BNP Paribas, said: "The pick-up in the series... is a particularly unhelpful outcome that will make it even harder for the MPC to step up the pace of interest rate easing in the near term.
"Presentationally, with concrete news that inflation and inflation expectations are rising, but at this stage only limited evidence that activity is suffering, it is very hard for the MPC to pick up the pace of easing."
The Bank of England reduced interest rates by a quarter point in December and again in February as it tried to ward off a sharp slowdown. The MPC kept rates on hold at 5.25 per cent this month and most economists expect the next cut to be in May.
Mr King has said 2008 is the hardest year since the Bank gained independence on monetary policy in 1997. He has warned inflation could hit 3 per cent more than once this year, triggering explanatory letters to the Chancellor.
So far, higher inflation expectations do not appear to be driving higher pay settlements. But manufacturers, retailers and service providers are raising prices where possible to maintain their margins threatened by the higher cost of raw materials. Howard Wheeldon, chief UK and European economist at Global Insight, said the Bank was "very aware the higher inflation expectations go... the greater will be the risk wages will eventually move up".
- 1 Lightning kills an entire football team
- 2 Fear for deported Saudi 'ridiculous', says Malaysian home minister
- 3 Eight arrests as Murdoch 'throws staff to the wolves'
- 4 Israel blames Iran for embassy bomb attacks
- 5 Now The Sun tries to call in its favours from Downing Street
- 6 I was born to be a killer. Every night I see the Devil in my dreams
- 7 BBC to issue global apology for documentaries that broke rules
- 1 Kate Allen: It's time for America to put an end to this shameful scandal
- 2 Spotify: 1 million plays, £108 return
- 3 Chemotherapy is 'safe during pregnancy'
- 4 Rhodri Marsden: What we like and what we don't like are often closer than you'd think
- 5 BBC to issue global apology for documentaries that broke rules
- 6 Lightning kills an entire football team
- 7 I was born to be a killer. Every night I see the Devil in my dreams
- 8 Henry does it his way, ending on a high note
- 9 Modern lovers: The 'sexual body warriors' and pioneers transforming 21st-century relationships
- 10 Redknapp hints at same old faces for England
Free trial of new Independent iPad app
Get your daily dose of the best of British journalism, sponsored by American Airlines
Win a three-week coastal jaunt
Spend three weeks exploring every nook and cranny of gorgeous Atlantic Canada.
Amazing restaurant offers
Three glasses of free champagne and a special menu at 46 top London restaurants.
Latest Independent competitions
Win anything from gadgets to five-star holidays on our competitions and offers page.
Commercial thought leaders
Watch the best in the business world give their insights into the world of business.
Day In a Page
Apple admits it has a human rights problem
James Lawton: AVB looks all at sea
Procrastination: Not now – I'm busy
Silent revolution at the Baftas
The diva who had – and lost – it all


Comments