Oil price threat to UK inflation rates

Rising oil prices could scupper efforts to keep inflation in check, the head of the Bank of Engand has warned.

The Bank's Monetary Policy Committee (MPC) expects inflation to top 4 per cent this year - more than double its 2 per cent target - but has previously stressed the temporary nature of the spike.

Governor Mervyn King told MPs on the Treasury Select Committee that oil prices - which hit a record of almost $140 a barrel earlier this month - could "make it that much more difficult" to control the cost of living and possibly prompt action from the Bank if it fed into wage demands.

His warning comes amid predictions from some City analysts that oil prices could even hit $200 a barrel.

Bank director Paul Tucker added: "The greatest hazard that we could encounter is that oil continues to rise and 'temporary' gets extended."

Mr King said there was "no magic bullet" to protect the UK economy from the high prices but said that the current elevated cost of oil contained the "seeds of its own destruction" because of the impact on demand.

The Bank's policy makers are also facing the headaches of rising food costs and the prospect of higher household energy bills, which they have warned will lead to a "temporary pause" in the growth of families' standards of living this year.

Mr King said he was confident of getting inflation back to its 2 per cent target within the two-year time frame of the MPC but gave no hint on the direction of interest rates.

He said the MPC would "not make gestures in either direction" and added: "I'm confident that we will bring inflation back to the target but I can't tell you what level of interest rates we will need to see to achieve that."

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