BoE's King issues inflation warning
Interest rates are less likely to fall again this year following a warning from Bank of England Governor Mervyn King that inflation could surge way past the government's upper limit of 3%.
The near-term outlook for inflation has "deteriorated markedly" over the past three months due to rising energy and import prices, he said in the Bank's monthly inflation report.
These factors are likely to push inflation up further, "possibly significantly", in the coming months, while consumer spending and output growth may slow sharply as price hikes feed through to household bills.
"The balancing act faced by the Monetary Policy Committee is even more challenging than it was in February," said King.
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A sharp decline in economic growth might be averted if borrowing costs are cut this year, but at the risk of higher inflation.
King and his colleagues, charged with keeping consumer price inflation (CPI) at 2%, will be forced to write a letter of explanation to Chancellor Alistair Darling if it tops 3%.
Yesterday, it was revealed that higher energy and food costs pushed CPI inflation up to 3% in April from 2.5% in March.
"The MPC is facing its most difficult challenge yet. For the time being at least, the nice decade is behind us," said King today.
