By Agency Reporter

Friday, 18 Feb 2011

LONDON: Prices are set to rise sharply in coming months and inflation could even top six per cent in the short-term, the Bank of England has warned.

However, Governor Mervyn King stressed that the Bank had an “iron clad” commitment to keeping any rise in the cost of living at two per cent.

The British Broadcasting Corporation reported on Thursday that the predictions came in the Bank’s latest inflation report, eagerly awaited by the City for clues as to when interest rates may rise.

King confirmed that the Bank expected inflation to remain high and above the level previously predicted this year, before dropping in 2012.

“That mainly reflects further sharp increases in commodity and import prices in the past three months,” King said.

A sharp rise in the cost of food has been seen globally in recent months

“Prices are likely to rise sharply in the first half of this year, but unless food, energy and other commodity prices continue to rise at the same rate, CPI inflation will then fall back.”

However, he added, the extent to which inflation would fall back was uncertain.

The Governor also dismissed suggestions, the Bank was “laying the ground for a rate rise” in its inflation report.

He said, “I think some people are getting ahead of themselves.”

“We never pre-announce a decision on interest rates – we haven’t taken one yet. We take those decisions month by month.”

Many analysts are predicting a rate rise as early as the spring

Meanwhile, the Bank of England downgraded its UK economic growth forecast, but offered reassurance that a double-dip recession was unlikely.

“The rebalancing of the economy, so necessary to ensure the recovery is sustainable, is underway,” King said.

The report follows Thursday’s inflation figures, which showed a further acceleration in living costs to four per cent in January.

King admitted in a letter to the Chancellor that there were “real differences of view” among the Monetary Policy Committeeover how to tackle the above-target inflation.

Bank of England monetary policy committee member, Andrew Sentance, has put further pressure on colleagues over high UK inflation in a speech.

He questioned claims that unemployment and spare capacity in the UK economy would slow down price rises, which he instead blamed on strong global demand.

Sentance has voted for an interest rate rise since June, and was joined by another committee member in January.

Bank governor, Mervyn King, has said that inflation will remain high this year.

Consumer prices inflation rose to four per cent in January – twice the Bank’s official target – largely due to rising commodity prices and the VAT increase.

King said this week that the Bank expected inflation to remain higher-than-expected due largely to sharp rises in food and fuel prices.

In his speech to the Institute of Economic Affairs, Sentance said that the “output gap” – economist-speak for how much less the UK economy is producing than its potential – is not as great as in previous recessions.

Source: Punch