Sharp rise in inflation will exceed target, warns King

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The Independent Online

The Governor of the Bank of England, Mervyn King, has again warned that inflation will sharply exceed the Government's target and is likely to hit 3 per cent. However, Mr King stressed that the Bank's Monetary Policy Committee, which will meet next week, face "a delicate balancing act" on deciding whether to move the base rate, currently at 5.25 per cent.

The comments, in a speech given in Jerusalem to the Bank of Israel, did little to help the pound, which slid to a fresh low against the euro of 79.66p.

Mr King also took the opportunity to call for "radical" thinking about financial regulation and, implicitly, a leading role for the Bank of England, perhaps regaining control over the "prudential" regulation of banks while the Financial Services Authority concentrates on "conduct of business".

"It is hard to imagine taking steps either to prevent, or to deal with, the consequences of a financial crisis without the active involvement of the central bank... In the longer term, it seems extremely likely that banks and other 'near' banks will be called upon to hold more capital and a greater quantity of liquid assets than hitherto," said Mr King.

"The best thing that we can do to promote economic stability is to avoid inflation, and inflation expectations, from becoming dislodged from the target in the first place," he added. The Bank does not want to see higher prices feed into higher pay settlements and firms passing cost increases on to consumers. Yet Mr King was also clear that the Bank did not want to over-compensate for an inflationary surge that, he acknowledged, the Bank can now do little about, especially as the Bank has an officially sanctioned "flexible" inflation target, allowing the MPC some leeway in times of external shocks to the system.

The latest index of activity in the service sector published by the Office for National Statistics demonstrated a surprising resilience in financial services. It showed a rise of 0.6 per cent in activity in January, over December, with the annualised growth rate over recent months slowing from 2.8 per cent to 2 per cent. Less encouragingly, the Royal Institution of Chartered Surveyors (RICS) said that growth in construction workloads had fallen to their lowest level since 1996.