Mervyn King, Governor of the Bank of England, warned last night that quickening inflation may force him to write one or more open letters to Chancellor Alistair Darling explaining why the Bank of England had missed its two per cent inflation target by more than a full percentage point.
Shortly before he spoke, the Bank stated that it had no plans to follow the example of the US Federal Reserve and bring forward the meeting of its interest-setting Monetary Policy Committee scheduled for February 6 and 7.
It was clear from Mr King's speech in Bristol that he does see scope for another rate cut to follow up that in December.
"We start the year from a position in which the bank rate, at 5.5 per cent, is probably bearing down on demand," he said. He made it equally clear, though, that containing inflationary expectations ranks high among his priorities.
"So 2008 is likely to see higher energy prices, higher food prices and, with a lower exchange rate, higher import prices, pushing inflation above the two per cent target," he said.
"It is possible that inflation could rise to the level at which I would need to write an open letter of explanation, possibly more than one, to the Chancellor."
Little can be done now to prevent some rise in inflation this year, Mr King said, but if the rise does not affect longer-term expectations, then it could start to fall back towards the end of the year.
The pressure was coming from oil prices, even though they have dropped below $90 a barrel, and the associated cost of wholesale gas.