Inflation to top 4% but King rules out rate rise

He ripped up forecasts made just a month ago after shocking figures showed inflation jumped well above the 2% target to 3.3% in May.

The dramatic increase triggered an open letter from King to Chancellor of the Exchequer Alistair Darling to explain why inflation was so high and what he plans to do about it.

It was only the second such letter to be penned since the Bank was given independence when New Labour came to power in 1997. The first was in April last year after inflation for March hit 3.1%.

King blamed the hike seen today on higher prices for food, fuel, gas and electricity. He said he now expects inflation to "rise sharply in the second half of the year to above 4%" and "remain markedly above target well into 2009".

In May's inflation report, he predicted inflation to peak at little over 3.5% before returning to target, but today hen said oil prices have risen another 15% since then. Crude hit a record high of almost $140 a barrel last night. The pound surged against currencies around the world immediately after the inflation figures were released on expectations that the Bank will raise interest rates. However, it gave back much of the gains after King warned that rate rises could send the economy into crisis and possibly recession.

"The [monetary policy] committee believes that, if Bank Rate were set to bring inflation back to target within the next 12 months, the result would be unnecessary volatility in output and employment," he wrote in the letter. "So the committee is aiming to return inflation to the 2% target within around two years, when the present sharp rises in energy and food prices will have dropped out.

"The path of Bank Rate that will be necessary to meet the 2% target is uncertain. The MPC will continue to make its judgment about the appropriate level of Bank Rate month by month."

Economists said the letter struck a "dovish" tone, and suggested the Bank was not prepared to raise rates to rein in inflation. However, they also said there was little chance of a cut this year despite the prospect of a sharp and prolonged slowdown in the economy and threat of recession. The Bank has cut rates from 5.75% to 5% since December.

King said he was "concerned about the present and prospective period of above-target inflation", and it was vital that inflation expectations were kept under control and wages did not spiral.

He said he expects inflation to return to target eventually, but added: "To return inflation to target, it will be necessary for economic growth to slow this year. A slowdown is already in train.

"Moreover, the prospective squeeze on real incomes associated with higher inflation, together with the reduced availability of credit, is likely to lead to a further slowing in activity this year."

King added: "The committee will maintain price stability by ensuring that the rise in inflation is temporary and that it returns to the 2% target."