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Written by THE ASSOCIATED PRESS
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Friday, 22 August 2008 |
LONDON - A member of the Bank of England's interest-rate setting committee warned Tuesday that Britain is running the risk of uncontrolled inflation - comments that sent the pound down on currency markets.
Writing in the Sun newspaper, Tim Besley said "it would be easy to give in and let inflation get out of control - that's what happened in the 1970s."
During the middle of that decade, inflation reached 20 per cent.
It currently stands at 4.4 per cent, but Bank of England governor Mervyn King has predicted that it will rise to five per cent before coming down again, as a result of rising food and fuel prices. That's more than double the government's inflation target of two per cent.
Central banks are in a difficult position at the moment. Businesses want rate cuts to stimulate the slowing economy and ward off a recession, while rate increases are the bank's chief tool to bring inflation down. In August, the bank took the middle ground, holding interest rates at five per cent for the fourth consecutive month.
Besley, who voted for a rate increase in July, urged readers to help the problem by not chasing inflationary wage increases.
"Everyone wants to protect their living standard," he said, "But if everyone does it, prices will just go up again ... and we'll all be back to square one, but with inflation still high."
Besley concluded his article by predicting that inflation would fall close to the two per cent target by the end of 2009, opening the door for economy-boosting rate cuts then.
The market responded by selling the pound, because, if rates are cut next year as Besley's comment suggests is likely, investments in the currency will become less profitable.
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Last Updated ( Friday, 22 August 2008 )
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