British annual inflation rises to 3.2 percent

16th November 2010, Comments 0 comments

British annual inflation hit a four-month high of 3.2 percent in October, official data showed Tuesday, but with economic recovery slowing, analysts said interest rates hikes were a long way off.

Higher fuel prices sent British 12-month inflation rising from a level of 3.1 percent in September, the Office for National Statistics said in a statement.

October's reading of 3.2 percent was in line with analyst expectations, according to a survey by Dow Jones Newswires, but far higher than the Bank of England's (BoE) target rate of 2.0 percent.

The ONS added that Consumer Price Index (CPI) inflation climbed by 0.3 percent in October from September, also in line with market forecasts.

Responding to the data, BoE governor Mervyn King said the annual inflation rate was expected to remain above target over the next year.

"Indeed, over the next few months the inflation rate might rise further" he said, as Britain prepares for a hike in VAT sales tax from January 1.

King's comments came in a letter to finance minister George Osborne, to whom the BoE governor is obliged to write each time the official annual inflation rate reaches above 3.0 percent.

In his own written response, Chancellor of the Exchequer Osborne acknowledged the highly uncertain nature of prospects to inflation.

With inflation high and Britain's growth recovery slowing, the Bank of England earlier this month held its key interest rate at a record low 0.50 percent and opted against fresh injections of funds into the economy.

Back in March 2009, the BoE's Monetary Policy Committee (MPC) slashed rates to 0.50 percent -- where they have stood ever since -- and launched a radical bond-purchasing policy that was dubbed quantitative easing (QE).

"The next few months will not be comfortable for Mr King and his colleagues and much will depend on the behaviour of inflation expectations," said Jonathan Loynes, chief European economist at Capital Economics.

"Indeed, with the recovery likely to disappoint and the enormous fiscal squeeze looming large, we still think that the MPC will be required to provide further policy support in the form of additional quantitative easing next year."

Britain's government, led by Prime Minister David Cameron, last month unveiled the country's harshest spending cuts in decades.

Osborne plans to axe half a million public sector jobs as he seeks to almost erase Britain's record deficit totalling almost 155 billion pounds (180 billion euros, 250 billion dollars).

Against such a backdrop, "the MPC seems unlikely to raise interest rates at any time soon," said Philip Shaw, an economist at Investec Securities.

© 2010 AFP

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