Bank soothes rate rise fears

The Bank of England yesterday shrugged off the sharp rise in inflation in January, easing fears that the monetary policy committee might raise rates as soon as next month.

The deputy governor, Mervyn King admitted that the Bank had been surprised by the rise, which took inflation above the government's 2.5% target, but said one-off factors accounted for much of the increase.

"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 as he delivered the Bank's quarterly inflation outlook.

The January data were not ready when Bank staff prepared their latest forecast of price pressures but the MPC had been given a preview when it decided to keep rates on hold at 4% last week.

Mr King said the committee had been expecting about half of the 0.7% increase because of rises in seasonal food prices and energy costs.

But with Monday's data showing the first signs that buoyant consumer spending is pushing up prices in many parts of the economy, analysts said the MPC was unlikely to cut rates again, even though its own forecast shows inflation remaining below the 2.5% target over the next two years.

"They may be in no hurry to raise rates but it will be hard for them to ignore any more bad news on inflation," said Geoffrey Dicks, UK economist at the Royal Bank of Scotland.

Mr King said prospects for the economy, where strong consumer demand has offset the deepest manufacturing recession for 10 years, remained good. "Despite the sharp slowdown in the world economy, the UK economy continues to expand and growth has been faster than in the other G7 economies. The outlook remains one of growth close to trend."