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Bank of England: no rate cuts for a year

Trouble ahead: Bank of England Governor Mervyn King
Jonathan Prynn, Business Editor @JonPrynn|Consumer Affairs Editor
13 April 2012

Hopes of cuts in mortgage rates disappeared today with the warning that inflation will stay high well into next year.

The bleak forecast from the Bank of England's Governor Mervyn King came after the official measure of inflation jumped to 3.3 per cent - the highest level in 16 years. He said inflation is now almost certain to go over four per cent by this autumn.

It means that homeowners and the property market can expect no boost from cheaper mortgages for the foreseeable future.

Today's figures show that food, drink, fuel and energy costs were the main culprits for the jump in the Consumer Prices Index from three per cent last month.

Food prices are 7.8 per cent higher than a year ago with staples such as eggs soaring by 38.8 per cent, butter by 31.9 per cent and bread by 14.7 per cent.

Petrol was 18.4 per cent dearer than a year previously while electricity bills were 9.6 per cent more expensive and gas bills up by 7.1 per cent. The inflation figure forced Mr King to write an open letter to Chancellor Alistair Darling explaining how the Bank plans to bring prices under control.

City economists said a cut in the base rates from five per cent will not happen "for many months to come".

Only a matter of weeks ago many economists had been forecasting interest rates dropping in the summer and the autumn. The delay brings a new political headache for Gordon Brown as it bites deep into the time available for interest rate cuts to start boosting the economy before he has to go to the country by May 2010.

The Governor is required to write the letter if the CPI goes above three per cent, or more than one per cent over the two per cent target rate.

It is only the second time that he has had to do it since the Bank was granted interest rate setting independence by Mr Brown in May 1997.

In his sombre four-page letter, Mr King said food, fuel, gas and electricity price rises accounted for more than 90 per cent of the increase in the rate of inflation. Fuel and food price rises flooding through the economy meant "inflation is likely to rise sharply in the second half of the year, to above four per cent".

He wrote: "So CPI inflation is likely to remain markedly above the target until well into 2009. I expect therefore, that this will be the first of a series of open letters over the next year or so."

But in a hint of good news, Mr King suggested that the economy was slowing so rapidly that interest rate rises are unlikely to be necessary.

Charles Davis, economist at the CEBR think tank, said: "With the letter in the post and considerable inflationary pressures remaining across the globe, further Bank of England rate cuts in the near term are unlikely. The inflationary pressures seem set to linger until towards the end of 2009."

Howard Archer at City forecasters Global Insight said: "We currently think it is more likely that the Bank of England will keep interest rates at their current level for many months to come, before eventually trimming them."

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Alistair Darling
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