Interest rates may hit 4% next month
GOVERNOR of the Bank of England Mervyn King hinted that interest rates may have to rise despite a new inflation target.
The Governor said that the switch to a new consumer prices index (CPI), based on a European measure, might give the impression that price rises were below target.
'Does this mean that monetary policy in the coming months will need to be looser under the new target than it was under the old target? The answer is no,' King said.
His comments came as new inflation figures showed CPI rose 0.4% in December and the annual rate was steady at 1.3%, well below the 2% target. On the old basis, inflation is still running at 2.6%, ahead of the former target of 2.5%.
Some City analysts think the cost of borrowing could rise from 3.75% to 4% next month. The Governor remains concerned about the rapid rise in house prices, saying they still need to be tracked.
One reason for lifting interest rates is the rising budget deficit. The Treasury Select Committee says 'tax receipts have come in under target for the last three years' and it calls on Chancellor Gordon Brown to conduct more research to see why this has happened.
It fears the Chancellor is not putting enough money aside in public spending projections for potential cost overruns. The TSC says Government departments are failing to manage capital spending efficiently. It calls for more transparency in explaining differences in current and capital spending.
