UPDATE 2-UK CPI rises, BoE ready to act in either direction

* UK consumer inflation rises to 3.2 percent

* BoE’s King says may change policy in either direction

* Minutes of last rate-setting meeting due Wednesday

(Updates after King letter)

By Peter Griffiths and Christina Fincher

LONDON, Nov 16 (BestGrowthStock) – British inflation unexpectedly
rose further above its target in October but the Bank of England
said it was ready to change policy in either direction as the
risks to the outlook were substantial on both sides.

The Office for National Statistics said on Tuesday that
annual consumer price inflation rose to 3.2 percent last month,
more than a percentage point above the Bank’s 2 percent target.
It has now exceeded 3 percent every month since March.

Analysts had expected it to stay at 3.1 percent and sterling
shot up around half a cent against the dollar as traders bet the
stubbornly high inflation figures meant the BoE’s Monetary
Policy Committee will not pump more stimulus into the economy.

But Governor Mervyn King, forced by his remit to write a
fourth letter of explanation this year as to why inflation is so
high, said the rise was likely temporary and that spare capacity
in the economy would bring the CPI rate down in the medium-term.

He said that while inflation would likely stay above target
for the next year because of a planned VAT rise and higher
commodity prices, monetary policy operated with lags and had to
balance competing upside and downside risks to inflation.

“The committee is ready to adjust policy — in either
direction — in order to ensure that the risks to the outlook in
the medium-term remain evenly balance around the 2 percent
target,” the letter said.

Finance minister George Osborne replied that he noted King’s
points.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For full text of King's letter and Osborne's reply, click: [ID:nLDE6AF0NJ] and [ID:nLDE6AF0Z8] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

BALANCING RISKS

The BoE left interest rates at a record low of 0.5 percent
this month and kept its 200 billion pounds ($319 billion)
quantitative easing programme on ice but the jury remains out on
what the next move in policy will be.

The MPC was split 3 ways in October, with one member calling
for a rate hike, another for a cut and the remaining seven for
unchanged policy.

Minutes showing November’s voting record will be published
on Wednesday. King and other BoE official are also due to
testify to a parliamentary committee later on Tuesday.

Policymakers have been grappling with above-target inflation
on one side, and on the other, the prospect of recovery from the
worst recession since World War 2 being thrown off track by the
global economy and planned fiscal tightening.

Analysts are also divided about whether rates will rise from
their record low of 0.5 percent or if the BoE will follow the
U.S. Federal Reserve and expand its quantitative easing.

“There is a non-negligible chance that inflation
expectations get dislodged. Under these circumstances, it’s
difficult to see the MPC embark on another round of quantitative
easing,” said Amit Kara, economist at UBS.

But Peter Dixon, economist at Commerzbank countered: “The
BoE really has to focus on growth at the moment given what’s
going on in the rest of the world. They’ve ignored higher
inflation this year and they can afford to do so for a
considerable time to come.”

Projections published by the central bank last week showed
inflation could rise above 3.5 percent at the start of next year
— when a rise in VAT will kick in — but would fall back below
2 percent in early 2012.

Retail price inflation, which includes more housing costs
and forms the basis of many wage deals, eased slightly to 4.5
percent last month from 4.6 percent in September.
(Reporting by Sumeet Desai; editing by Mike Peacock)

UPDATE 2-UK CPI rises, BoE ready to act in either direction