MPC sacrificing inflation target

THE Bank of England has ripped up its inflation-busting remit to give a short-term boost to the economy, some City watchers have warned.

They say that by concentrating on stimulating growth rather than curbing price pressures, the Bank's monetary policy committee is compromising its official inflation targeting role.

Inflation has been above its 2.5% target for nine months, during which interest rates have been slashed to a 48-year low of 3.5%. Wednesday's quarterly Inflation Report revealed that it sees inflation on course to overshoot the target at its two-year horizon.

John Butler, chief UK economist at HSBC, says the MPC appears to have torn up Gordon Brown's remit when it was set up in 1997. This states its objective is to deliver price stability (as defined by the inflation target) and, without prejudice to that, to support the Government's economic policy, including its objectives for growth and employment.

Butler said: 'By continuing to boost growth, it is encouraging consumption and driving consumers into debt. As a result of the MPC's actions, we think household spending will be very weak in 2004.'

Michael Hume at Lehman Brothers said that, after three years of below-target inflation, the Bank is more relaxed.

'There is a lot of doubt about the sustainability of the recovery and the Bank is putting more weight on the downside risks. We have also detected a bit more tolerance towards higher inflation because it undershot the target so long.'