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King confident on inflation fall King confident on inflation fall
(about 1 hour later)
The governor of the Bank of England, Mervyn King, has told MPs he is confident that inflation will fall back to the government's 2% target.The governor of the Bank of England, Mervyn King, has told MPs he is confident that inflation will fall back to the government's 2% target.
But an economic slowdown was needed to ensure inflation returned to the goal in the next year or so, Mr King said.But an economic slowdown was needed to ensure inflation returned to the goal in the next year or so, Mr King said.
He warned rising food and energy prices may push inflation above 4% this year.He warned rising food and energy prices may push inflation above 4% this year.
His Treasury Select Committee appearance comes a week after he wrote to the chancellor, explaining why inflation had hit 3.3%.His Treasury Select Committee appearance comes a week after he wrote to the chancellor, explaining why inflation had hit 3.3%.
Last week, he said the UK faced its "most difficult economic challenge for two decades".Last week, he said the UK faced its "most difficult economic challenge for two decades".
Higher interest rates would be needed as a result, Mr King added, but he did not commit himself to any particular level.
House price speculationHouse price speculation
Oil prices were now higher than the 1970s in real terms, while the depreciation of sterling had made imports more expensive, he told MPs. Oil prices - which came close to $140 a barrel earlier this month - were now higher in than the 1970s in real terms, he told MPs, while the depreciation of sterling had made imports more expensive.
"This will pass through to household bills and consumer prices." "This will pass through to household bills and consumer prices," he said.
Growth and house prices were likely to fall, he said in his Mansion House speech last week, adding that real take-home pay would stagnate, making life difficult for some families. The comments followed last month's Mansion House speech where he said that growth and house prices were likely to fall and that real take-home pay would stagnate, making life difficult for some families.
The removal of the erroneous belief that house prices will only ever grow in real terms is not a bad thing Kate Barker, MPC memberThe removal of the erroneous belief that house prices will only ever grow in real terms is not a bad thing Kate Barker, MPC member
The Office for National Statistics (ONS) said the Consumer Prices Index (CPI) rose by 3.3% in May, up from 3% in April.The Office for National Statistics (ONS) said the Consumer Prices Index (CPI) rose by 3.3% in May, up from 3% in April.
This is the fastest rate since the CPI measure began in 1997, the ONS said.This is the fastest rate since the CPI measure began in 1997, the ONS said.
The wider Retail Prices Index measure of inflation rose to 4.3% from 4.2% the previous month.The wider Retail Prices Index measure of inflation rose to 4.3% from 4.2% the previous month.
'Pull back''Pull back'
On the housing market, Mr King said that the situation was very different from the 1990s - with levels of people in arrears and the number of repossessions much lower today. On the housing market, Mr King said that the situation was very different from the troubles of the early 1990s - with levels of people in arrears and the number of repossessions much lower today.
But he forecast a "period of extremely weak activity" in the housing market as people took stock of what was happening to prices.But he forecast a "period of extremely weak activity" in the housing market as people took stock of what was happening to prices.
"None of us can really know where house prices will go," Mr King said."None of us can really know where house prices will go," Mr King said.
"We are going through a period of adjustment now, in which, because any prospective purchaser can't really judge the likely level of house prices and where they'll settle. "We are going through a period of adjustment now, in which, because any prospective purchaser can't really judge the likely level of house prices and where they'll settle, it would be a very natural response to pull back and to wait until the market's reached a new equilibrium before coming in."
"It would be a very natural response to pull back and to wait until the market's reached a new equilibrium before coming in."
What would happen was "difficult to predict", he added, though said the situation had to be monitored.What would happen was "difficult to predict", he added, though said the situation had to be monitored.
Another member of the Bank's Monetary Policy Committee, Kate Barker, told MPs that while a fall in house prices was not, in the short term, good news, it had served a useful purpose.Another member of the Bank's Monetary Policy Committee, Kate Barker, told MPs that while a fall in house prices was not, in the short term, good news, it had served a useful purpose.
"There was an element of speculation in the market, especially in buy-to-let," Ms Barker said."There was an element of speculation in the market, especially in buy-to-let," Ms Barker said.
"So the removal of the erroneous belief that house prices will only ever grow in real terms is not a bad thing.""So the removal of the erroneous belief that house prices will only ever grow in real terms is not a bad thing."
She added that the market correction was different from the 1990s, when there had been "a much faster slowdown in the economy as a whole and a much greater rise in unemployment".
But she said that there were worrying signs in the construction sector, which had seen a fall this year "that it took almost six years to achieve in the 1990s".