Inflation fears hit rate cut hopes

Hopes that the Bank of England could cut borrowing costs again for Britain's 11m homeowners receded last night when the Bank's deputy governor warned of rising inflationary pressures.

Mervyn King said the economy was in for a bumpy ride, because of the growing imbalance between the declining manufacturing sector and the robust state of consumer demand.

"For that part of the economy producing internationally tradable goods and services, output is falling while consumer spending is buoyant," he said in a speech last night to Cardiff Business School. "Imbalances on this scale are unsustainable."

Mr King said consumer spending had to grow more slowly to make room for the large increase in government spending, and the growing imbalance within the economy posed a risk to the inflation outlook.

With inflation below the government's target, the Bank's monetary policy committee has been able to cut rates by 75 basis points since the start of the year to insulate Britain from the impact of the slowdown in the world economy. But Mr King warned there were signs of a resurgence in inflation, although he cautioned against placing too much emphasis on one month's figures.

"There are now tentative signs of a pick-up in goods prices," he said. "The MPC will monitor the price data extremely carefully."

Sterling's continuing strength remains a stumbling block to euro entry, according to Bundesbank head Ernst Welteke yesterday. "The current exchange rate for the pound is too high," he warned.