King eases fears of rate rise despite worrying data

Immigration, globalisation and weaker trade unions have made Britain less prone to inflation than 30 years ago, Mervyn King, governor of the Bank of England, said in a keynote speech last night.

Adopting a wait-and-see approach to interest rates, Mr King used one of his three big annual addresses on the UK economy to stress that structural changes meant upward pressures on the cost of living were less serious than in decades past.

The governor eased fears that the Bank's monetary policy committee would follow central banks in Europe and the US in pushing up the cost of borrowing in response to evidence of mounting inflationary pressure.

Figures out yesterday showed that a sharp increase in petrol prices last month resulted in the cost of goods leaving factories rising by 3% in the year to May - the fastest rate of growth since September last year, according to the Office for National Statistics. Meanwhile, the Department for Communities and Local Government (formerly the Office of the Deputy Prime Minister) reported that annual house price inflation jumped to an 11-month high of 5.1% in April from 3.3% in March.

Mr King said there was little evidence that increases in fuel and raw material costs were feeding through into higher inflation. "Despite sharp increases in energy prices, both consumer price inflation and inflation expectations have remained close to target. Pay pressures in the labour market are muted, reflecting in part the need of employers to adopt a tough stance in wage bargaining when faced by such large increases in other input costs."

Factory-gate prices are seen as an early warning sign of inflationary pressures in the high street, but Mr King said the Bank was not yet convinced that there was a serious problem. "Inflation expectations ... have moved up during the course of this year. Although not of serious concern as yet, the MPC will monitor inflation expectations carefully."

The governor said there were three factors keeping inflation under control. "At home, there has been a sequence of reforms to the labour market which began in the 1980s and have continued since. Reforms such as the New Deal and Working Tax Credit have encouraged benefit recipients back to work. Changes to pay bargaining and a decline in the share of wage settlements covered by collective bargaining have made the labour market more flexible. Those reforms reduced the rate of structural unemployment."

Globalisation had also had an impact, with the cost of manufactured goods falling as a result of the integration of India and China into the world economy.

Finally, Britain had been affected by migration, particularly from the new member countries of the European Union. "Migration on this scale raised the potential growth rate of the UK economy and probably dampened the response of costs and prices to changes in demand.

"Inflows of migrant workers from the new member countries of the EU remain high. That may or may not continue, and we cannot be sure that migrants would stay in the UK if the labour market were to turn down."