Bank Of England soothes interest hike fears

The Bank of England has eased fears that yesterday's shock rise in the rate of inflation could prompt a hike in the cost of borrowing…

The Bank of England has eased fears that yesterday's shock rise in the rate of inflation could prompt a hike in the cost of borrowing.

Deputy governor Mr Mervyn King said it was the job of the Bank's Monetary Policy Committee (MPC) to look beyond volatility in inflation.

Interest rates have been lowered to 4 per cent in recent months but fears are growing that higher borrowing rates may be needed to control spending.

That mood was heightened by official figures yesterday showing that the underlying rate of inflation jumped 0.7 per cent to 2.6 per cent in January.

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Higher petrol and seasonal food prices were blamed, although City experts said the Bank of England may also need to dampen buoyant high street spending to keep inflation on course for the Government's target of 2.5 per cent.

But Mr King said inflation numbers were likely to be volatile in the near term because of seasonal fluctuations beyond the committee's control.

He added: "Short-run movements in inflation are normal, monetary policy cannot easily affect them, and the MPC needs to look through them to form a judgment about the degree of inflationary pressures further ahead."

Mr King said the rate-setting committee had received an early warning of an increase in inflation last week but chose to keep the figure on hold at 4 per cent.

His comments came as a key report from the Bank of England suggested inflation was on course to remain close to its target level of 2.5 per cent.