Slowdown in growth as Bank faces pressure to raise rates

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The Independent Online

The economy suffered a marked slowdown in growth in the final three months of last year, official figures released tomorrow are expected to show, as the Governor of the Bank of England, Mervyn King, prepares to make a speech tomorrow evening at a time of harsh criticism of the Bank's ability to control inflation.

The Prime Minister, David Cameron, has recently expressed his "concern" about price rises.

Having expanded by 0.7 per cent in the period from July to September and 1.1 per cent in the second quarter of 2010, most economists expect growth in the last 12 weeks of the year to slow again, with the typical prediction being a modest 0.4 per cent expansion in GDP.

That would bring growth for 2010 to 1.6 per cent, after a fall of 4.9 per cent in 2009 and 0.1 per cent in 2008. Such a performance would be broadly in line with the latest estimates from the Office for Budget Responsibility, and a significantly better result than widely predicted at the start of the year.

However, the impact of the snow will make the preliminary estimates by the Office for National Statistics unusually tentative and they have, in any case, been significantly revised in the past.

As with the cold snap at the start of 2010, it will also take time to see if the potential loss of output in late 2010 is made up in the first months of 2011.

Crucially, then, Bank of England policy makers may not have an accurate picture of what is really happening in the economy until the first quarter's GDP data is published in May, and they might even wish to wait for subsequent revisions before deciding on whether to raise interest rates.

The Bank's Monetary Policy Committee has come under increasingly intense pressure to raise rates as inflation trend is above the Bank's forecasts. In December, prices rose at an annual rate of 3.7 per cent, driven higher by world commodity prices and past rises in VAT.

The recent increase in VAT to 20 per cent will have prevented inflation easing closer to the MPC's target of 2 per cent.

Spiralling global commodity prices are pushing inflation higher, especially for food, energy and petrol.

Though public expectations of inflation have been rising, a matter of central concern to the Bank, there is scant evidence as yet that wage inflation is taking hold, generating a "home grown" or "cost push" inflationary spiral.

Nonetheless, Mr King may well take the opportunity in his speech in Newcastle tomorrow night to reassure critics who claim that the Bank is complacent about inflation or has even quietly shelved the target – and rebut arguments that the Bank needs to nudge Bank Rate up from 0.5 per cent to win "credibility".

The MPC has been split on whether to raise rates or even expand quantitative easing – the direct injection of £200bn so far into the economy – and the minutes of this month's MPC session on Wednesday are expected to confirm the continuing debate.

Last week, the leading proponent of a continuation of easing policy, Adam Posen, repeated his belief that inflation would fall back to target in the medium term.

The Bank of England's Head of Markets, Paul Fisher, has also reiterated the Bank's responsibility to see through short-term fluctuations and unpopularity to focus on the medium- term prospects.

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