BoE Gives Stark Warning On UK Inflation Rate

UK inflation will fall slower than predicted over the coming year, placing continued pressure on already hard-pressed households.

Following yesterday's news that the rate of inflation notched back up slightly in March, the Bank of England's deputy governor Paul Tucker said inflation was "uncomfortably high" and will probably not fall as fast as the central bank has forecast.

Food, clothes and oil prices prodded inflation up to 3.5% last month, halting a five-month decline from a peak of 5.2% in September 2011.

Inflation had been predicted to fall below its 2% target later this year but it is now expected to remain above 3% throughout the second quarter of this year and possibly into the second half of the year, Mr Tucker said.

He said: "Though it [inflation] has fallen significantly over the past six months, from over 5% to 3.5% on yesterday's reading, it remains uncomfortably above target.

"The Monetary Policy Committee (MPC) will guide inflation back to target in the medium term, but in the near term there is considerable uncertainty about the path that it will follow."

Some of Mr Tucker's fellow policymakers have also voiced concerns over the inflation outlook, giving a strong hint that another cash boost for the economy may be off the table.

Prepared to gamble that Britain's economic recovery remains on track, they now look unlikely to back another round of asset-buying by the bank when its current £325bn quantitative-easing (QE) programme is completed in May.

The latest minutes from the bank's MPC showed long-standing flag-bearer for further QE, Adam Posen, dropped his call for more, leaving only one policy-maker supporting a further stimulus, which would be likely to push up inflation.

The sharp change in tone could also bring forward expectations for interest rate rises.

Evidence that the UK economy may be on the mend - something that would make further BoE stimulus unnecessary - came from official data showing an unexpected fall in unemployment in the three months to February.

But official growth data next week may well show the economy is in a technical recession, something acknowledged by the BoE.

:: A group of MPs have urged the Government to offset the pain QE is causing savers.

The Commons Treasury Select committee's report into last month's Budget said more information was needed on the effects of the £325bn of new money effectively "printed" by the Bank of England, which has eroded the value of pensioners' savings.

The report said: "We recommend that the Government consider whether there are any measures that should be taken to mitigate the re-distributional effects of quantitative easing, and if appropriate consult on them at the time of the Autumn Statement."