Inflation is still above the Bank of England target.
The Bank of England inflation target is more than a percentage point above the 2% goal.
UK inflation rose by 0.01% between October and November to 3.3% under the Consumer Prices Index (CPI) following record price increases for clothing, furniture and food. The rate is well above the government’s 2% target.
The Retail Prices Index (RPI), which includes mortgage payments, rose to 4.7% from October’s figure of 4.5%.
Member of the Bank of England’s Monetary Policy Committee Andrew Sentance warned that the CPI could increase to 4% next year as a result of the January VAT rise from 17.5% to 20%. He added that interest rates would need to rise correspondingly.
The policymaker is the only member of the committee to vote for a rise in interest rates from the historic low of 0.5%. Other members still believe that no action should be taken.
Mr Sentance said: “I think the worry I would have is if we don’t begin to move interest rates up gradually now, we will find further down the track that we actually have to move them up more sharply. And that could deliver a bigger jolt to confidence in the economy in the future”.
The Bank of England’s deputy governor Charles Bean said that policymakers are keeping a close eye on inflationary pressures. He explained that more money may have to be injected into the economy in the form of quantitative easing if growth weakens. However, such a move would be inflationary and the chances of a second round of Quantitative Easing look to have lengthened with the new inflation numbers.
Mr Bean said: “There are very significant downside risks, particularly from the eurozone sovereign debt crisis. If that unfolds in an unhappy fashion, I think it is quite plausible that it would have a significant adverse impact on the UK. Under those circumstances, we might well want to undertake a further round of quantitative easing”.
Inflation has remained over the 2% target for the past 12 months causing Bank of England Governor Mervyn King to write a selection of explanatory letters to the chancellor over the course of the year.
