MPC member predicts inflation will go above 2%

CONTINUING strong consumer demand will probably push British inflation up above its two per cent per cent target, Bank of England Monetary Policy Committee member Paul Tucker said.

Explaining the thinking behind his decision to vote for a rise in interest rates last month - against the majority decision to leave them unchanged - Mr Tucker said his own view was that the risks were slightly less to the downside than the MPC’s central view.

For example, Mr Tucker cited the recent rise in the consumer price index as evidence that inflation was not materially stuck below target.

"The puzzle about the apparent weak feed-through from demand to inflation is reduced somewhat by the committee’s judgement that the performance of the labour market improved over recent years," he said.

"That leaves continuing demand pressures likely to feed through to inflation, looking ahead."

When the BoE released the minutes of its February meeting last week, the report said an increase from the current level of 4.75 per cent "might be warranted in due course" if the economy evolved in line with its projections.

Richard McGuire, a strategist at RBC Capital Markets, said: "The fact that he believes recent rises in CPI indicate we are not stuck materially below the two per cent CPI target will serve to further provoke concern that the MPC is poised for a further rate hike over the near term."

The MPC has now left interest rates on hold for six months in a row, but Mr Tucker’s call for a hike last month and a run of hawkish comments from other MPC members has raised the betting that borrowing costs could hit five per cent by May.

"With monetary policy needing to be set on a medium-term view, overall I concluded at the MPC’s latest meeting that our interest rate should be increased by 25 basis points - a small tweak to reflect the outlook," Mr Tucker said.