Bank governor dashes hopes of rate cut to boost growth

The Bank of England governor, Mervyn King, moved to quell any lingering hopes of an interest rate cut arriving next month by emphasising that the Bank is targeting inflation, not overall growth or retail sales.

Figures last week showed inflation at its highest level since 1996 on rising oil prices while growth remained below its long-term average and retail sales stayed sluggish.

The Bank's monetary policy committee cut interest rates in August, for the first time in two years, to 4.5%, in response to general economic weakness but since then inflation has moved up to 2.5%, above the government target of 2%.

"I think a number of people in the last six months have been talking as if the MPC were targeting total demand or, even more oddly, targeting retail sales and consumer spending. We are not. We are trying to target inflation. We have an inflation target," Mr King told a House of Lords committee.

Financial markets had assumed until recently that the MPC might cut rates next month when it will have completed its latest quarterly round of forecasts. Sluggish economic growth would pull its inflation profile lower, many analysts thought, necessitating a rate cut.

But sentiment has shifted over the past week or so, as economic data has generally come in stronger than expected.

In any case, the governor emphasised, the Bank cannot control the economy with any precision. "The idea that the MPC can fine-tune the economy and can in fact ensure that the economy always seems to grow at some fixed rate every quarter is absolutely imaginary. It's important that people understand what we can do but also what we can't do."

He struck a relatively relaxed note on inflation, in spite of it being above target. About half of the rise was down to oil and the other half to a rise in underlying inflation pressures, he said, but there was little sign of it feeding through into wage inflation. "We would be concerned if earnings growth were to pick up sharply in response to the recent rise in inflation. We will watch very carefully for that. So far there is no sign of it and it is important that it remains stable."

The Bank's chief economist, Charlie Bean, added that the pick-up in producer prices was fairly benign but the MPC might be concerned if factory gate inflation continued to rise.

Mr King said it was not unusual for the nine-member MPC to be divided over the direction of interest rates. The unanimity of voting last year was exceptional, and a divergence of views was healthy.