King hints at interest rates being left on hold

The Bank of England will "monitor carefully" households' rising inflation expectations, Mervyn King said yesterday as official figures showed a sharp rise in the price of both houses and factory goods.

But the Bank's governor said pay pressures were "muted" in the face of soaring oil prices, which would dampen growth of consumer incomes and spending. His comments came in an even-handed speech that is likely to be seen in the City as a sign that the Monetary Policy Committee (MPC) will keep interest rates on hold for the foreseeable future.

In a keynote speech to a business audience in Edinburgh, Mr King said rates might have been too low during the world boom of the past three years as inflationary pressures were now appearing across the industrialised world. He said the economic outlook had become more uncertain in terms of demand and supply.

"One risk is that during the fastest three-year growth period of world economic growth for a generation, monetary policy around the world may simply have been too accommodative," he said. "Even though the stimulus is being withdrawn its effects are still being felt [and] there are some of inflationary pressures in the main industrial world." He said this had fed through to a rise in goods imported from China.

He said the Bank "took comfort" from the fact that both inflation and inflation expectations had remained close to target in the UK. "Pay pressures are muted, reflecting in part the need of employers to adopt a tough stance in wage bargaining when faced by such large increases in other input costs," he said. "Inflation expectations have moved up ... Although not of serious concern as yet, the MPC will monitor inflation expectations carefully."

His remarks came as government figures showed manufactured goods prices hit an eight-month high last month while house price inflation rose at its fastest annual pace in a year in April.

The Department for Communities and Local Government said, meanwhile, that annual house price inflation accelerated to 5.1 per cent in April from 3.3 per cent in March.

Howard Archer, the chief UK economist at Global Insight, said: "Higher producer price output inflation will not go down well with the Bank and may well heighten belief among the more hawkish members of the MPC that the case is growing for an early hike in rates."