Bank of England governor Mark Carney told the Treasury Select Committee in Westminster this morning (17 October) that he expects UK inflation to peak at just more than 3 per cent, in the next two months.
Mr Carney was speaking minutes after the UK inflation rate for September was revealed to be 3 per cent, the highest for five years.
The Bank governor is required to write to the Chancellor, Philip Hammond, if inflation moves more than one per cent above the 2 per cent target level.
Mr Carney said it is “more likely than not” that he will be writing such a letter in the coming months.
He said he expects the rate to peak this month or in November at slightly more than 3 per cent, and that he and colleagues at Bank of England had expected inflation to hit 3 per cent around now.
Mr Carney said the rise in inflation is almost entirely the result of the drop in the value of sterling, and he expects this impact to drop out of the statistics in the coming months.
The governor would not be drawn on the likelihood of interest rates rising in November, but said the challenge the central bank faces is to strike a balance between putting rates up to ease inflationary pressure in the economy, and keeping monetary policy loose to aide the economy in times of economic strife.
He said the cut in interest rates implemented immediately after the EU referendum result was the right thing to do to secure economic growth, but that the “trade off” between protecting against higher inflation and securing economic growth has changed, to the point where a rate rise would be unlikely to hamper growth, but could ease inflationary pressure.
Economic theory suggests an increase in interest rates pushes inflation down because it increases the value of the income derived on sterling assets to overseas buyers, increasing demand for those assets, pushing the value of the currency upwards.
David.Thorpe@ft.com
