King gives assurance after 3.5% CPI spike
Bank of England Governor Mervyn King yesterday insisted a jump in inflation to 3.5% was ‘temporary’ as the surge in January's figure triggered a letter of explanation to Chancellor Alistair Darling.
Mr King has to write a letter to the Chancellor in the event that inflation is more than 1% above the Bank's 2% target. January's rate of 3.5% was the highest level for the Consumer Prices Index measure of inflation since November 2008.
In his correspondence, Mr King said: “Although it is likely to remain high over the next few months, inflation is more likely than not to fall back to the target in the second half of this year.”
He said the return of VAT to 17.5%, a 70% hike in oil prices over the past year and the effects of sterling's depreciation had all played their part in the inflation spike.
Mr King said the Bank's Monetary Policy Committee believed the rise was a ‘temporary deviation’ from the target.
He said that, in the longer term, the measure would be dragged lower by weak spending, which has created a ‘substantial margin of spare capacity within the economy’. This has already been seen in weak wage growth, he added.
The Governor said the effects of the Bank's £200bn quantitative easing (QE) programme to boost the money supply and record low interest rates would continue to aid the economy for some time.
He said the MPC was ready to take ‘whatever actions are necessary to ensure the outlook is for inflation to remain in line with the 2% target’.
Mr King also reiterated his comments last week that the QE scheme — which has recently come to a halt — could be restarted if needed.
Ulster Bank chief economist Richard Ramsey said the latest CPI figure had created the widest differential to date — 5.9% — betweeen the Republic’s inflation rate and the UK. He added: “The Republic’s continued deflation, in contrast to Northern Ireland’s inflationary pressures, alongside the weakening in the euro, will continue to erode the north- south price differential which is encouraging the influx of shoppers from the Republic to Northern Ireland.”