Tuesday, June 12, 2007

Inflation slows, but market still bets on higher rates

LONDON (AFP) - Inflation slowed to its weakest pace for seven months in May, as lower domestic energy prices sparked the second monthly drop in a row.
But analysts said the news was overshadowed by comments from Bank of England governor Mervyn King, who made a speech late Monday warning that the central bank may once more be forced to hike interest rates.
Last week the BoE's Monetary Policy Committee had frozen interest rates at a six-year high of 5.50 percent as it took stock of a quarter-point increase in May that was aimed at keeping a lid on inflation.
On Tuesday, the Office for National Statistics (ONS) said that 12-month inflation slowed to 2.5 percent in May, which was the weakest inflation reading since October 2006, and compared with 2.8 percent in April.
However, King warned of capacity pressures, pricing intentions and inflation expectations and said that "if these indicators remain elevated, the Monetary Policy Committee may need to take further action."
Most experts think the central bank will tighten monetary policy again in the coming months, despite the recent modest slowdown to inflation after it had breached the BoE's comfort zone in March.
"The Bank of England governor effectively neutered the good news contained in this month's release, directing market attention firmly to the medium-term and highlighting concerns over the outlook," said Investec analyst David Page.
He added: "The governor's speech appears to cement our view that rates are likely to rise again and we continue to look to 5.75 percent in July."
The ONS said Tuesday that the main downward pressure on 12-month inflation in May came from average gas and electricity bills, which continued to drop this year but rose a year ago.
There were also downward effects in May from food, non-alcoholic beverages and clothing.
On a monthly basis, the Consumer Price Index rose by 0.3 percent in May from April. Both the annual and monthly readings were in line with market expectations.
"Consumer price inflation moderated slightly more than expected in May, which is obviously welcome news for the Bank of England, but the bank is by no means out of the inflation woods yet and another interest rate hike remains very much on the cards by August at the latest," Global Insight analyst Howard Archer said.
He added that there was a "very real possibility" that rates could reach 6.00 percent by the end of the year, citing the central bank's recent concerns on the upside risks to inflation.
The Bank of England's rate hike in May was the fourth increase in nine months and came after inflation had hit a decade-high level of 3.1 percent in March.
The bank indicated in a report last month that rates would have to reach 5.75 percent if inflation were to remain on-target. The bank is charged with keeping inflation within a 1.0-percent band either side of 2.0-percent.
An encouraging development, but this does not change the fact that Gordon Brown's frivolous, old-style tax-and-spend economic policies have returned us to the status of a stop-go economy.

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