23 Jan, 2008
Published: 11:02 Wednesday 23 January
By: Dylan Lobo, Investment News Editor
minutes from last month's UK interest rate meeting and last night's
speech from Bank of England Governor Mervyn King have scotched
hopes the Bank of England (BoE) would follow yesterday's dramatic
move by the US Federal Reserve.
Eight out of the nine-strong BoE's Monetary Policy Committee
(MPC) opted to keep rates at 5.5% at the meeting held from 9-10
January. David Blanchflower, who voted for a 0.25% cut, was the
The hawkish vote hit sentiment in markets. The FTSE 100, which
started the day in strong fashion was nursing a loss of around 50
points at 10.50am.
At a dinner last night hosted by the Institute of Directors and the
Confederation of British Industry, King warned this year will pose
economic challenges for the UK more so than at any other time since
the BoE was given independence since 1997.
He said: 'The challenge to the Monetary Policy Committee's
ability to navigate our way through the next year reflects two
strong economic winds; one from the west and one from the east.
'The former is the credit crunch which has blown across the
Atlantic, and threatens a sharp slowing in output growth. The
latter is the rise in energy and food prices, reflecting continued
strong growth in Asia, that, together with rising import prices,
threaten to lift inflation noticeably above target in the coming
King added that while central banks have the capacity to respond to
the consequences of strains in the banking systems for their
economies, the solution to the underlying problems does not rest
with them but with the banks and financial markets themselves.
'Banks must reveal losses promptly, and, most importantly, raise
new capital where necessary,' King said.
He does not believe the tighter credit condition in markets will be
short lived and warned that weaker activity and lower asset prices
could result in another round of losses for banks and a further
tightening of credit conditions.
But it was King's comments on inflation which really quelled
speculation that the MPC would follow yesterday's extreme move
by the Fed, which cut rates by 0.75% in an emergency move in a
desperate bid to stave off inflation.
King said: 'It is possible that inflation could rise to the level
at which I would need to write an open letter of explanation,
possibly more than one, to the chancellor.
'Although there is little we can do now to avoid some rise in
inflation this year, the task of the Monetary Policy Committee is
to ensure that it is short-lived.'
The worries over inflation were highlighted in the minutes from the
The minutes said: 'The upside risks to inflation from supply-side
developments had increased in each of the past two months, largely
reflecting changes in food and energy prices and the exchange
It added higher food and fuel prices had contributed to higher
input and output inflation. Manufacturers' input prices jumped by
1.7% in November, while output prices jumped by 0.5% to take the
annual rate to 4.5%, it highest level since 1991.
The MPC also said sterling weakness could stoke inflationary
'Financial market prices suggested that there was a significant
risk of further falls in sterling. If that were to crystallise,
further pressures would be put on retail prices via higher import
prices, the extend depending on the spread and degree of
'Higher inflation in the short run could raise wage and price
setters' inflation expectations, posing an upside risk to inflation
over the medium term.'