King Says Bank of England May Keep Rate at Record Low for Months to Come

Bank of England Governor Mervyn King. Photographer: Chris Ratcliife/Bloomberg

The Bank of England’s central forecast is for inflation to peak at about 4.4 percent this year before easing to the goal by the middle of 2012. Photographer: Simon Dawson/Bloomberg

Bank of England Governor Mervyn King said policy makers haven’t preannounced an interest-rate increase and may need to keep borrowing costs at a record low to aid a recovery that is “unlikely to be smooth.”

“Some people are running ahead of themselves in saying that we are preannouncing, or we’re laying the ground, for a rate rise,” King told reporters in London today. “That decision has not been taken and it won’t be taken until we get to the next meeting, or the following meeting” and “it may be many quarters before we do anything.”

The bank today forecast inflation will quicken from a two- year high and peak at about 4.4 percent before easing to its 2 percent target by the middle of 2012, while the growth outlook has worsened. Britain is about to endure a budget squeeze that will eliminate 330,000 jobs at a time when unemployment is already rising in the aftermath of the recession, a situation that has divided the bank’s policy makers.

“With these enormous challenges which few of us have experienced in our lifetime, with these big and difficult judgments about whether inflation expectations might pick up, about what will happen to the future path of inflation, how much spare capacity is there, surely this is the sort of time when you’d expect differences in view and judgment on the committee,” King said.

The pound fell after the release of the forecasts, dropping more than 0.6 percent against the dollar and trading at $1.6058 as of 12:18 p.m. in London. The yield on the U.K. 10-year government bond was down 7 basis points at 3.78 percent.

Investors

The central bank’s projections in its quarterly Inflation Report are based on the market’s view for the benchmark interest rate to rise to 1 percent by the end of this year and 2 percent by end-2012. Investors pared bets on an increase by June, with the yield on short-sterling futures expiring that month falling to 1.11 percent today from 1.18 percent yesterday.

The bank held its key rate at a record low of 0.5 percent and its bond-purchase plan at 200 billion pounds ($321 billion) this month. Minutes of the decision to be published next week will show if other officials joined Andrew Sentance and Martin Weale’s push for higher rates, or if Adam Posen kept up his call for stimulus.

‘Differences’

“There are bound to be differences of view,” King said. “If you don’t get differences of view in this kind of situation, when ever would you find them?”

He said the “best collective judgment of the committee is that the chances of inflation being above or below the target are broadly equal,” adding that the recovery is “unlikely to be smooth.”

U.K. inflation accelerated to a 26-month high of 4 percent last month, boosted by higher oil prices and a sales-tax increase. Britons’ expectations for price growth for the coming 12 months rose to 3.6 percent in January, the highest since 2008, Citigroup Inc. said on Jan. 28.

The bank sees inflation at about 1.7 percent in the first quarter of 2013, based on a chart of quarterly average projections. Gross-domestic-product growth is seen at about an annual 3 percent. The bank publishes its predictions in the form of fan charts without specifying exact numbers. It will release data indicating exact figures next week.

Upside Skew

“The most likely outcome is for inflation to fall a little below the target in the second half of the period, but the risks relative to that most likely path are skewed to the upside,” the bank said in the report. “There remains a wider range of views than usual” on the Monetary Policy Committee.

Hetal Mehta, an economist at Daiwa Capital Markets Europe, brought forward her forecast for the first rate increase to August from November. Simon Hayes at Barclay’s Capital in London also revised his forecast and now sees the bank increasing borrowing costs in May. He said there were “two important messages” in the report.

“The first is that the MPC is leaning towards a rate hike over the next few months,” he said in an e-mailed note. “The second is that the envisaged policy tightening is small and gradual and still potentially subject to delay, depending on the evolution of the data.”

On growth, the bank said there is a “high degree of uncertainty over the outlook” after the economy shrank 0.5 percent in the fourth quarter. The contraction, the biggest for more than a year, was partly due to the coldest December in a century keeping shoppers home and stranding travelers.

“That projection for growth implies a somewhat lower level of output throughout the forecast than judged likely in November, reflecting the weakness of output around the turn of the year and the higher assumed path for bank rate,” the central bank said. “But the committee also judges it likely that some margin of spare capacity will remain throughout the forecast period.”

King also said interest rates can’t stay low forever.

“But I think that’s down the road,” he said at the press conference. “It’s not the immediate policy question, but it’s something we’re conscious of in the back of our minds.”

To contact the reporter on this story: Jennifer Ryan at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net