Bank of England's Paul Tucker warns on inflation rate

Bank of England
Image caption The outlook for inflation is now not so sunny, the Bank warns

Inflation may stay above 3% during the rest of this year, according to Paul Tucker, a deputy governor of the Bank of England.

Mr Tucker said the short-term resilience of inflation was "bad news".

Separately, the Bank has warned of the possibility the economy may fall into recession again this year.

Its Monetary Policy Committee said output may drop in the first six months of this year, after contracting in the last quarter of 2011.

Falling more slowly

Mr Tucker said he had based his updated prediction on higher energy prices and tax increases in the Budget.

The Bank's previous forecast was that the inflation rate would probably fall to the official 2% target by the end of 2012.

On Tuesday, the official figures from the Office for National Statistics showed a rise in the rate of inflation from 3.4% to 3.5% in March.

Mr Tucker, who is tipped to replace Sir Mervyn King as Bank governor next year, described these figures as "uncomfortably above target".

"Easily the [Monetary Policy Committee's] biggest judgement in recent years has been that inflation will gradually fall back to the 2% target," he told a business audience in Liverpool.

The short-term course of inflation would be "a little higher than incorporated into the central projection described in the MPC's February Inflation Report", Mr Tucker said.

"I think inflation might remain above 3% throughout the second quarter of this year, and possibly into the second half of the year," he added.


Hugh Pym, the BBC's chief economics correspondent, said: "Bank sources point out this is Mr Tucker's personal view.

"But it is significant that one of the deputy governors is now more pessimistic about inflation."

Despite this change to the official short-term outlook, Mr Tucker stressed that the Bank of England would still try to ensure that the inflation rate eventually hit the 2% target.

"The MPC will ensure that it does return to target and that medium-term inflation expectations are anchored to the target.

"We shall not let that slip," he said.

Analysts stressed the importance of Mr Tucker's comments on inflation in terms of future monetary policy.

"Markets have been scaling back quite significantly their expectations of any further quantitative easing, or printing of money," RBS economist Ross Walker told BBC News.

Fresh recession?

Mr Tucker's concerns were echoed by the rest of the MPC at its April meeting, when the members again held bank rate at 0.5%.

"There was a greater chance than before that above-target inflation would persist into the medium term," the minutes of the meeting recorded.

All nine members voted to keep rates stable, while just one member, David Miles, voted for a £25bn boost to the Bank's quantitative easing (QE) financial stimulus programme.

Looking at the wider economic outlook, the MPC members expressed concern that the UK might be heading back into recession, even though they thought this was not the most likely outcome.

A sharp drop in construction output may have depressed overall economic output in the first quarter of 2012.

And an extra bank holiday for the Queen's forthcoming diamond jubilee might have the same effect in the second quarter of the year.

"With output having already contracted in the fourth quarter of last year, the committee could not rule out the publication of official data showing GDP falling for three successive quarters," the MPC minutes said.

"Nevertheless, the committee's judgement was that, abstracting from both the puzzling weakness in measured construction output and the impact of one-off factors, the economy appeared likely to be expanding, albeit only modestly, in the first half of the year."

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