Inflation set to push higher, warns Bank's Paul Tucker

Paul Tucker, the lone member of the Bank of England's Monetary Policy Committee to vote for a rise in interest rates last month, laid out the case for higher borrowing costs in a keynote speech yesterday. Amid growing signs the Bank is preparing the ground for a rate rise, Mr Tucker said rising demand would push inflation through the 2 per cent target.

Paul Tucker, the lone member of the Bank of England's Monetary Policy Committee to vote for a rise in interest rates last month, laid out the case for higher borrowing costs in a keynote speech yesterday. Amid growing signs the Bank is preparing the ground for a rate rise, Mr Tucker said rising demand would push inflation through the 2 per cent target.

A mixed set of data has left the next move in rates resting on a knife-edge, with a marked upturn in the housing market offset by signs of weakness in manufacturing and retail. And Ed Balls, Gordon Brown's former right-hand man, signalled that the Government would not object to a pre-election rate rise.

"In my judgement, there is on balance most likely a degree of excess demand in the economy," Mr Tucker told a regional meeting of the CBI in Surrey. "Conditions of excess demand, combined with the likelihood of stronger import prices, point to inflation gradually rising back towards and through the 2 per cent target over the next two years or so." He said there were continuing demand pressures likely to feed through to inflation. "The recent rise in CPI inflation suggests that we were not stuck materially below the inflation target," he added.

Mr Tucker said his vote to raise rates three weeks ago was only "a small tweak" to bring the inflation forecast back in line with the Bank's 2.0 per cent target. Analysts said that showed the differences within the committee were not great. "Even the most hawkish MPC member sees the need for a small tweak at this stage rather than anything more dramatic," Malcolm Barr, the UK economist at JP Morgan Chase, said.

Mr Tucker focused on structural changes in the UK economy, echoing many of the themes from the February Inflation Report: anchored inflation expectations, intense competitive pressures and a flexible labour market. His speech follows warnings on inflation pressures from three fellow members of the nine-strong Monetary Policy Committee, Kate Barker, Charlie Bean and Rachel Lomax. But Stephen Nickell took a more patient line in his interview with The Independent, warning of putting rates up too quickly. Marian Bell, who has a reputation as a "dove", is expected to take a similar stance when she speaks today.

The comments and relatively strong economic data have prompted some City banks to pencil in a rate rise before, or around, a likely 5 May election. Mr Balls, a prospective Labour candidate, appeared to give the green light to an early move yesterday, saying it would signal that the economy was strong.

The economist, who was criticised last year for appearing to send signals close to rate decisions, said: "No one wants to go back to when decisions were not taken early. If the MPC were to judge a rate rise was justified pre-election because of the strength of the economy - I'm not predicting they are going to do that, but if they were to make that judgement - I don't believe it would be a big election issue in Britain or a problem for Labour."

Mervyn King has said the Bank will ignore the election timetable. "Every time we meet, we will set rates to target inflation: period."