Bank sees 'sharp' inflation drop

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Bank of England Governor Mervyn King said that there could be a "sharp" decline in the UK's rate of inflation over the next four to six months.

Giving testimony to parliament, Mr King said the Bank was determined to bring inflation back within its 2% target.

The Bank also said that the strength of the UK housing market over the past year was a "significant" development.

The comments come as many analysts are predicting that interest rates will increase in May to slow price growth.

Money costs

Interest rates were left unchanged at 5.25% earlier this month.

Analysts are now forecasting that rates will climb to 5.5% in May after inflation figures topped market estimates and house price growth has continued.

Mr King was required to write a letter to the Treasury earlier this month to explain why the annual inflation rate had topped the 3% in March.

On Tuesday he said that lower energy costs and higher borrowing costs probably would led to slower price growth in coming months.

"There could be a sharp fall in inflation in the next four to six months," Mr King told the Treasury Committee.

"We are completely determined to bring inflation back to target. That's our purpose in life," he added.

Demand squeeze

The Bank's Monetary Policy Committee (MPC), which meets to set the UK's interest rates, also commented on the effect of house prices and consumer debt on its decisions.

"Minor changes in the housing market are not going to make us change interest rates but the fact that the housing market has picked up strongly over the last year is significant," said Kate Barker of the MPC.

"The rise of housing prices over the last year has been linked with the big fall we've seen in long-term real interest rates and to some extent with the restriction of supply in the housing market compared to demand," she added.

The MPC said that UK house prices had risen because of low interest rates and limited supply.

Ms Barker said that while there are a number of households that have an unsustainably high level of debt, it was not a "big concern for monetary policy".