Inflation 'needs rate rise control'

INFLATION is today expected to remain at more than twice the Bank of England's target as one monetary policy committee member argues that an early rise in interest rates could avoid a sharp rise in the future.

Martin Weale says that a rate rise now to curb inflation would give the Bank of England more flexibility.

"If inflationary pressures subsequently prove more severe than the central part of our forecast suggests, then it will be a help to have started to raise interest rates earlier," Weale told a meeting of UK finance directors in London last night.

Hide Ad
Hide Ad

"But if they prove less strong then subsequent increases can be slower than would otherwise be the case. Indeed, if the economy is extremely weak, interest rates can be reduced again."

His comments echo those of Andrew Sentance who recently stood down from the MPC after campaigning to raise rates.

Economists predict today's Office for National Statistics data will show the consumer prices index measure of inflation for May will hold at 4.5 per cent - its highest level for more than two years. It will be the 18th month in a row inflation has been above the Bank's target of 2 per cent.

Although transport costs are thought to have eased in May, this is expected to have been offset by food and energy price hikes. The unchanged inflation figure will ease the pressure on the Bank to raise interest rates from their historic low of 0.5 per cent, although inflation is still forecast to hit 5 per cent later this year. The rate is forecast to drop back towards target by 2013.