Bank of England's Mervyn King Seems to Throw in the Towel on 'Transitory' Inflation

by: TraderMark

While much of the U.S. financial media and blogosphere is having a field day with the word "transitory" since Bubble Bernanke used the term to explain away any inflation fears (after denying them entirely the previous year), it's not really Ben's term. Indeed, he has borrowed it from the Bank of England's top honcho, Mervyn King who has been using "transitory" as a way to explain away England's far more accurate inflation gauge (which does not have housing as the dominant weighting).

Keep in mind whenever inflation is over the central bank's target rate of 2%, Mr. King must write a letter to explain why. Hence, "transitory" has been a useful smokescreen for the past 15-18 months, but one must ask how long must a condition persist before transitory no longer works as an excuse. It appears based on this report, King is finally getting close to throwing in the towel and acknowledging it's time to fess up. Despite a dramatically slowing economy, due in part to "real" cutbacks in government King might be forced to raise interest rates to contain the 'transitory' forces.

  • Bank of EnglandGovernor Mervyn King said that inflation remains “uncomfortably high,” and officials signaled they may need to raise interest rates later this year even as the economy struggles. “The recent pattern of revisions to the projections over the next year -- downward to growth and upward to inflation -- has continued,” King told reporters in London today. Inflation “remains uncomfortably high and well above the 2 percent target. And there is a good chance that, if utility prices rise further later in the year, inflation will reach 5 percent.”
  • The pound rose after the release of the bank’s forecasts, which showed that a quarter-point interest-rate increase by the end of the year may be needed to control inflation, which officials see “markedly higher” in the short-term than they did in February. The central bank kept its benchmark rate at a record low of 0.5 percent last week to aid economic growth.
  • “The most likely outcome for growth in the medium term is somewhat weaker than in the February report, reflecting a more gradual recovery in consumption and a less pronounced boost from net exports,” the bank said in its Inflation Report published today. Inflation “is more likely than not to remain above the 2 percent target throughout 2012.”
  • Inflation across the world is persisting, putting pressure on central banks to withdraw stimulus and raise interest rates. Germany's rate jumped to 2.7 percent, more than initially estimated, separate data released today showed.
  • "Bank rates can’t stay at this level for ever,” King said. “But that doesn’t tell you what month” it will increase even if it’s a “reasonable judgment” that the interest rate will rise in next two years, he said.
  • Money markets expect a full 25 basis-point increase in the central bank’s key rate by December, Tullett Prebon Plc sterling overnight interbank average data show. Before the report, investors were factoring in a quarter-point rise in January.
  • Three of the bank’s nine policy makers voted for an interest-rate increase last month, while one called for an increase in the bank’s asset-purchase program from the current 200 billion pounds ($330 billion). The majority, including King, voted to leave policy unchanged. “There is a high degree of uncertainty, and an unusually wide range of views among committee members, about the strength of these various forces, and therefore around the overall outlook for inflation,” the bank said today.
Original aritcle