King defends interest rate rise

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The governor of the Bank of England has defended January's shock interest rate rise - saying it was a pre-emptive strike against higher increases.

Policymakers had been expected to wait at least a month before taking action.

But Mervyn King said that the quarter of a point rise to 5.25% was vital to prevent inflation straying further beyond the government's 2% target.

Speaking to the Birmingham Chamber of Commerce, he gave no hints on whether there would be further rate rises.

Inflation insight

On Wednesday, minutes of the Bank's Monetary Policy Committee (MPC) meeting will show how many of its nine members supported the rate increase.

Inflation is likely to fall back in the second half of the year, possibly quite sharply Mervyn King

In making its decision, the MPC knew that consumer price inflation (CPI) had risen from 2.7% to 3% in December, even though that figure had not been released.

"By responding early to changes in the inflation outlook, the MPC ultimately needs to raise interest rates by less than would be the case if we delayed," Mr King said.

He said it was "difficult to judge" how far inflation would come down, but said that many of the key factors behind surging inflation were waning.

Falling oil prices would impact on the price paid at the petrol pump and on utility bills while an increase in migrant workers would keep a cap on wage growth, he predicted.

"The Committee's central view remains that inflation is likely to fall back in the second half of the year, possibly quite sharply," Mr King added.

The January rate rise came as unwelcome surprise to many homeowners. It will add £16 to the monthly payments of those with a £100,000 repayment mortgage.

But it was welcomed by savers, who are hoping that banks and building societies pass on the increase to their savings rates.

Most analysts expect at least one more rate raise in 2007 - possibly as soon as next month.