Thursday 19th June 2008
With the official rate of inflation now at 3.3 per cent, the Bank of England has blamed a collection of "unanticipated increases" in prices for much of the growth in the headline figure.
Mervyn King, chancellor of the central bank, is required to write an open letter to the chancellor of the exchequer should the rate go beyond its target range of between one and three per cent.
As Mays calculation on the consumer price index is 3.3 per cent, the Bank recently published his letter of explanation of why inflation has been allowed to persist at a relatively high level.
Mr King explains that the Banks rate-setting body, the monetary policy committee, has taken the decision to reduce the base rate of interest on a number of occasions since December.
This conflicts with the usual course of action in the face of high inflation but, the governor asserts, an immediate increase in the base rate could have begun an adverse trend of unfavourable employment and output conditions.
He comments: "The risk is that the slowdown could be so sharp that inflation did not just return to the target but was pulled below.
"This explains why Bank Rate has been reduced at a time when inflation is above the target."
Mr King forecasts that inflation on the consumer price index could reach more than four per cent by the end of the year - noting that the annual average is itself likely to be inflated by the current high monthly figures.
As a result, it could be up to two years before the rate is brought within reach of its two per cent target, the governor predicts.
Meanwhile, Sir John Gieve has announced his intention to stand down from his current role with the Bank of England.
He explains that the current process of reforms being made to the Banks role within the UK economy is likely to benefit from someone taking his place who is able to commit to a full five-year term of involvement.
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