Gieve Sees U.K. Inflation Accelerating `Well Over' 4%

By Svenja O'Donnell and Jennifer Ryan

July 18 (Bloomberg) -- Bank of England Deputy Governor John Gieve said policy makers are balancing the risks of inflation, which will accelerate ``well over'' 4 percent, against the threat from economic growth, which is ``slowing fast.''

``We are expecting inflation to be well over 4 percent for much of the rest of the year,'' Gieve said in a speech in London today. ``Timely sources of data suggest the economy is already slowing fast.''

Policy Maker Andrew Sentance said in an interview yesterday he was ``particularly struck'' by the increase in inflation, which reached 3.8 percent in June, the fastest pace in at least 11 years. The Bank of England is trying to curb consumer-price gains while attempting to steer the economy away from a recession.

``With inflation rising well above target we need a period of slower growth to create a margin of spare capacity,'' Gieve said. ``We will do whatever it takes to bring inflation back to target in the medium term.''

Gieve said in response to questions that inflation expectations have risen, an increase which is ``worrying,'' and the central bank ``can't afford for it to get stuck higher.''

Rate Decision

Policy makers kept the U.K. benchmark interest rate unchanged at 5 percent for a third month on July 10. Gieve was among four committee members who told lawmakers in June they had considered raising interest rates, while Sentance said yesterday he also looked at the case for raising rates last month. Minutes showing how they all voted this month will be released on July 23.

Economic growth will slow to a 1 percent annual pace in the first quarter of 2009, the weakest since 1992, the Bank of England predicted on May 14. Governor Mervyn King said then that there may be ``an odd quarter or two of negative growth.''

Gieve said that he ``can't rule out'' the U.K. economy will go into a recession, adding that the economy is ``quite a long way'' from the end of the slowdown.

Faster consumer price gains and the worst housing-market slump since 1992 have eroded consumers' living standards and helped push the support for Prime Minister Gordon Brown's ruling Labour Party close to the lowest since World War II.

``House prices and transaction numbers are falling rapidly with direct effect on house builders and related services,'' Gieve said in the speech. ``There are signs the housing market is affecting consumer confidence.''

Banks are curbing lending following the collapse of the U.S. subprime mortgage market, which so far has cost financial institutions worldwide $423 billion in losses and writedowns.

While Gieve said the first phase of the credit crunch seems to have stabilized, he said the squeeze in lending ``may intensify in coming months.''

Gieve spoke at an event organized by Dow Jones Newswires at the London Stock Exchange.

To contact the reporters on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net; Jennifer Ryan in London at Jryan13@bloomberg.net.