King plays down talk of imminent interest rates rise

THE Governor of the Bank of England yesterday implied that the central bank would not be pushed around on interest rate policy, though he admitted an eventual increase was inevitable.

Publishing the Bank's quarterly inflation report, Mervyn King warned markets not to jump to conclusions about the timing or speed of any rate hikes from the historic low of 0.5 per cent.

"Some people are running ahead of themselves and saying that we are pre-announcing or laying the ground for a rate rise," King said. "That decision has not been taken and won't be taken until we get to the next (monetary policy committee] meeting or the following meeting, or it may be many quarters before we do something."

King added that "if we have learnt anything from the past three or four years, it is that so many unexpected things can happen in three months".

The pound fell 0.85 cents against both the US dollar and euro after the report's publication as investors had priced in a more hawkish outlook on rates after data this week showed inflation shot up to 4 per cent in January. Base rates have been frozen since March 2009.

Speculation about an early rise had intensified after King said in an open letter to the Chancellor this week that inflation was "likely" to return to the 2 per cent target on "the assumption that (the] Bank rate increases in line with market expectations".

Howard Archer, UK chief economist at IHS Global Insight, said: "I don't think King appears in any great hurry to raise interest rates, and I think the market has toned back their expectation of an imminent hike.

"The inflation report was slightly more hawkish, but the Governor's comments were more doveish."

David Tinsley, economist at nabCapital, said: "The market has taken it (the report] as doveish, but is still pricing in three rate rises this year. We view May (for the first hike] as likely."

King said the Bank was bound to raise interest rates at some point, but no secret decisions had been taken as to when.

The inflation report said the government's fiscal consolidation and squeeze on households' spending power were "likely to act as a break on growth", even though the recovery in the UK was likely to be maintained.

It said consumer price inflation was likely to hit 4 or 5 per cent in the middle of this year, but was likely to fall back further ahead. "Inflation is likely to remain higher over the next year and higher than the (MPC] expected three months ago," King said.

Higher commodity prices and the recent VAT rise were also partly responsible for continuing higher inflation, he added.

Martin Weale recently joined Andrew Sentance as the two hawks on the MPC voting for a rate rise, while another member, Adam Posen, has called for an increase in quantitative easing.Yesterday's report acknowledged a "wider than usual range of views" on the MPC about the outlook for growth.

But the Governor, alluding to "extraordinary circumstances" that had included a banking crisis and large rises in commodity and energy prices, told a news conference at the Bank: "This is the sort of time you would expect to see different opinions on the committee.

"If you don't get differences of view in this type of situation whenever would you find them?"

King said it was for other people to judge the Bank's "credibility" on inflation and monetary policy, but its aim was "dispassionate analysis" rather than "futile gestures".