British inflation is likely to rise towards 5% in the coming months, but any decision to raise interest rates will be based on longer-term goals, Bank of England (BoE) Governor Mervyn King said yesterday.
In a rare public speech, Mr King insisted that the BoE had been right not to raise interest rates over the past year as the continuing surge in inflation was still due to a mix of one-off pressures from import prices, oil and rises in indirect taxes.
The central bank would have to raise interest rates at some point, but the move would not be based on headline inflation numbers, he said.
'A return to economic stability from our fragile condition will require careful and well-judged steps looking beyond the next few months,' Mr King said in a speech to accountants in Newcastle, northeast England.
'We are less concerned with the inevitable short-run fluctuations of either inflation or GDP than with ... long-run stability.'
His remarks are likely to relieve Britain's government, as an early rise in interest rates would be an unwelcome extra burden on growth at a time of deep public spending cuts - especially after output unexpectedly fell in the last three months of 2010.
Mr King's comments amount to a defence against critics who argue that the BoE has been wrong to allow inflation to exceed its 2% target by at least a percentage point throughout 2010 - a situation which is unlikely to change in 2011.
Two BoE officials wanted a rate rise
Meanwhile, details of the last meeting of the Bank of England's Monetary Policy Committee meeting show that MPC member Martin Weale unexpectedly joined Andrew Sentance in voting for a quarter-point rate rise this month.
The minutes of the meeting said the MPC explicitly considered the case for a rate rise in January, and that for some members this was a finely balanced decision.
'For most members, recent developments implied that the risks to inflation in the medium term had probably shifted upwards,' the minutes said.
The deliberations took place, however, before policymakers knew that Britain's economy unexpectedly shrank by 0.5% in the last three months of 2010.
The MPC opted to keep rates on hold, citing downside risks to inflation from spare capacity, fiscal austerity, a potential jolt to exports from the euro zone crisis as well as tight credit conditions. The MPC had access to an early estimate of December's 3.7% inflation figure but did not know about the scale of the impact on growth from December's harsh weather.
