June 17, 2024

Britain Warns of Inflation Risk

The bank also said the British economy was not growing as fast as it had expected, as “the continuing squeeze on households’ real incomes is likely to weigh on demand, especially over the next year or so.”

“Although inflation fell to 4 percent in March, it remains uncomfortably high and well above the 2 percent target,” Mervyn A. King , the central bank governor, said at a news conference in London. “And there is a good chance that if utility prices rise further later in the year, inflation will reach 5 percent before falling back through 2012 and into 2013.”

Mr. King said that inflation was being driven primarily by higher prices for commodities and imports, as well as an increase in Britain’s value-added tax. Considering the sensitivity of inflation to such factors and recent volatility in commodity prices, he said, “there is a great deal of uncertainty in the outlook for inflation.”

The FTSE 100 slipped and the pound rose against the dollar, jumping to $1.6476 from $1.6367, on expectations that the bank would raise its main interest rate target this year from the current level of 0.5 percent, a record low, where it has stood since March 2009.

Because of increasing energy prices, consumer price inflation “is likely to rise further this year and is more likely than not to remain above the target throughout 2012,” the central bank said.

The latest data suggests the committee will make its first interest rate increase in the second half of 2011, possibly in August or November, Simon Hayes, an economist with Barclays Capital in London, wrote in a research note. Referring to the Bank of England Monetary Policy Committee, he wrote, “We believe most M.P.C. members will want to take the opportunity to move away from the current extremely loose policy setting, which, after all, was adopted as an emergency measure.”

The committee, Mr. Hayes wrote, “has become increasingly uncomfortable with the fact that it keeps pushing out the point at which inflation returns to target,” and “the current policy setting looks increasingly unlikely to generate the necessary drop at any reasonable time horizon.”

In the 17 nations of the euro zone, prices at the consumer level rose 2.7 percent in March from a year earlier, above the European Central Bank’s 2 percent target and matching the March rise in the United States.

Inflation in China is running at more than 5 percent.

The European Central Bank has already raised its main rate once this year and has signaled that another increase could come in July.

Article source: http://feeds.nytimes.com/click.phdo?i=0517c6c914014a88bf46912ecd9724dc

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