‘Blame cost of fuel and food for dearer loans’
RISING RATES: Bank expert reveals some of the thinking behind the inflation-led pain suffered by borrowers
RISING fuel and food prices are the underlying cause of higher interest rates, according to a Bank of England ratesetting expert.
Charlie Bean, the Bank’s chief economist, was one of the nine members of the Monetary Policy Committee who voted for the recent quarter per cent hike to 5.5 per cent.
The decision followed a sharp rise in inflation to 3.1 per cent, forcing the Governor Mervyn King to write a letter of explanation to Gordon Brown, Chancellor of the Exchequer.
Commentators appear united in their view that interest rates will rise a further quarter per cent in June, with some even predicting a half per cent rise.
Mr Bean declined to speculate about another rate increase. “I haven’t ruled it out and I haven’t ruled it in,” he said during a visit to Chatham Historic Dockyard.
Increases in the cost of oil, domestic gas and electricity had fuelled recent increases, Mr Bean said.
“They feed in pretty directly to consumer prices. A significant chunk of the increase was down to that. Global food prices have risen which reflect the global weather conditions such as drought in Australia.”
A recent report suggests that retail food prices could be heading for their biggest annual increase in 30 years.
Mr Bean spent two days in Kent and Medway sounding out local business people on the economic situation facing them
We will set interest rates at whatever level we think appropriate to achieve the target in the medium term
on the ground. Although interest rates were not high by historical standards, he said, it was necessary for the MPC to put a foot on the brake.
Mr Bean expected inflation to fall quite sharply for the rest of the year and come back close to target.
“We will set interest rates at whatever level we think appropriate to achieve the target in the medium term.
“Everything will depend on how the data unfold over time.”
According to minutes of May’s meeting, the MPC debated a half per cent rise. “But all nine of us on the committee decided that 25 basis points was the right move,” he said.
People should avoid concluding that just because there was talk of it last month that another increase in June was inevitable
“There does seem to be somewhat more underlying inflationary pressure than we had expected which is why we’ve been raising interest rates a bit.”
As for house prices, he was surprised by the continued buoyancy of the market.
“We didn’t expect it to be quite as strong as it has been.” THE Governor of the Bank of England, Mervyn King, receives more complaints when interest rates go down than when they rise, it has been revealed.
Charlie Bean, the Bank’s chief economist, said in Chatham Historic Dockyard that the media overlooked the needs of savers, focusing too much on the cost of borrowing and higher mortgage costs.
He said he understood the pain of people struggling to buy a home but added: “I empathise with them, but it’s also right to remember there are also a lot of people with savings, pensioners and so forth.
“The Governor gets more letters of complaint when we put interest rates down than when we put them up.
“Press coverage forgets people on the other side of the fence who rely on interest as income to survive.”
People – savers and borrowers – should always plan accordingly for interest rates rises and falls. “These sorts of swings and roundabouts are inevitable, frankly.”
Charlie Bean, chief economist at the Bank of England and a member of the Monetary Policy Committee, right, is pictured with Bill Ferris, chief executive, Chatham Historic Dockyard, outside HMS Cavalier