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King defends his ‘inflation-beating’ rate rise

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24/01/2007

Mervyn King, governor of the Bank of England, has defended this month’s unexpected interest rate rise by the Monetary Policy Committee (MPC), stating it was a ‘pre-emptive’ strike at the higher increases that would have been necessary if inflation continued to climb.

Interest rate levels are vital to saving and investment, as well as applicable to loans such as mortgages, although most observers felt that the Bank would wait until February before raising the rate.

But King said in a speech to the Birmingham Chamber of Commerce that the quarter-point rise to 5.25% was vital in keeping inflation below the Government’s 2% target and thus a key part of the national saving and investment effort.

However, he did not venture a hint as to whether or not more rises were in the pipeline, although many economists think this is very likely.

King said: “By responding early to changes in the inflation outlook, the MPC ultimately needs to raise rates by less than would be the case if we delayed. It is difficult to judge how far inflation will come down, and what effect that will have on saving and investment, but many of the reasons for surging inflation are waning.”

He concluded: “Falling oil prices would impact on the price paid by consumers for petrol and on utility bills, while the influx of migrant workers should keep a cap on wage growth.”

 

 

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