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Bank chief warns of budget squeeze
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Bank of England Governor Mervyn King has braced households for a further budget squeeze as policymakers struggle to get a grip on runaway inflation.
Mr King warned over the impact of soaring energy bills, food prices and dearer imports as the Bank's latest forecasts predicted Consumer Prices Index (CPI) inflation could spike as high as 3.7% this year.
"As those price increases feed through to household bills, they will lead to a squeeze on real take-home pay, which will slow consumer spending and output growth, perhaps sharply," the Governor said.
The Bank added to the gloom by predicting growth could slow to just 1% this year - well below official Government forecasts - as banks hit by the credit crunch tighten up lending and consumers alarmed by falling house prices save more.
Wages are meanwhile unlikely to grow significantly as businesses come under pressure and shed jobs.
But policymakers are unlikely to ride to the rescue of struggling homeowners and borrowers with a swathe of interest cuts because inflation is so high.
The Bank's Monetary Policy Committee (MPC) is charged with keeping inflation at 2%, but CPI is likely to remain above 3% until well into next year - prompting a series of open letters from Mr King to the Chancellor explaining the rise.
The report suggests CPI will remain well above its 2% target in two years' time if rates fall up to twice more this year to 4.5% as markets expect.
Even one more cut this year is by no means certain as the forecasts shows inflation undershooting the target by the narrowest of margins in two years' time if borrowing costs are held at 5%.
Mr King said the MPC faced an even more challenging balancing act between controlling inflation and preventing an economic slowdown than at the time of its February report.
