BIRMINGHAM, England, Jan 20 - The recent change in the Bank of England's inflation target will not mean interest rates will be lower in the coming months than they would otherwise be, Bank Governor Mervyn King said on Tuesday. His remarks are likely to reignite speculation that the Bank's Monetary Policy Committee will add to November's interest rate hike as soon as next month and put rates up by a quarter-point to 4.0 percent. "The change in target gives the impression that inflation has moved from above to below target. Does this mean that monetary policy in the coming months will need to be looser under the new target than it was with the old target? The answer is no," King told a business lunch.
Chancellor of the Exchequer Gordon Brown in December announced a change in both the Bank's inflation measure and target. It now targets the consumer price index (CPI) at 2.0 percent and not retail prices excluding mortgage payments (RPIX) at 2.5 percent. Inflation under the new measure is at just 1.3 percent, well below the new target, while RPIX is just above the old target at 2.6 percent, December figures out on Tuesday showed. This has led to speculation among economists that interest rates may not rise as fast as they would have done under RPIX in response to an acceleration in economic growth. But King told businessmen at Villa Park, home of premiership football club Aston Villa, that the main difference between the two measures could mostly be explained by strong house price inflation which is included in RPIX but not CPI.
HOUSE PRICE INFLATION TO SLOW
He said that the MPC felt house price inflation would slow over the coming two years -- its preferred time horizon --, bringing the gap between the two inflation measures to around 0.5 percentage points, close to their traditional gap caused by the difference in the way each averages price rises. "So the change in the target is unlikely to have any material impact on the decisions of the Monetary Policy Committee in the near future," he said. King added that the MPC would continue to monitor house prices carefully, as before, in order to "assess the implications for the inflation outlook resulting from changes in the balance between nominal demand and supply and in the exchange rate". He also said that as the change in the target did not affect underlying inflationary pressures in the economy, then the rates of increase of wages, prices or earnings should be unaffected. "In other words, wage bargaining should be unaffected by the switch in inflation target -- as should price setting by firms." King, a lifelong Aston Villa fan, added that the great economist John Maynard Keynes had once visited Villa Park. The occasion, he said, was a 1913 fixture between Villa and Blackburn Rovers. Unfortunately the home side lost 3-1 and finished the season second in the league behind Blackburn. "I have always wanted to perform at Villa Park. Now is my chance," said King.//