The Monetary Policy Committee's (MPC) Adam Posen has warned the Bank it should not try to compensate for its past mistakes in underestimating inflation by pushing up interest rates.
Posen said yesterday the UK's persistently above-target CPI inflation is "almost entirely" due to the depreciation of sterling prior to January 2009 and the increase in VAT in January 2010, the Independent reports.
"The MPC should not tighten in response to the inherently temporary effects on measured CPI inflation of a VAT increase," he says.
Posen has consistently argued the Bank should act again to boost demand in the economy, as public spending cuts make their effects felt on confidence, demand and growth.
His comments come amid intense debate at the Bank and in government circles on whether the nation might need a "Plan B" if the present combination of fiscal austerity and loose monetary policy fails to work.
EU Creates Post-2013 Crisis Tool
EU leaders have agreed to create a permanent crisis-management mechanism in 2013, while divisions flared over steps to debts contagion engulfing Portugal and Spain, Bloomberg reports.
Germany, the biggest contributor to Europe's bailouts of Greece and Ireland, yesterday pushed through an accord to set up a system to allow financial aid "if indispensable" to underpin the euro.
It might also force bondholders to bear some of the costs of future rescues.
"Our task now is to hold the course, walk not talk, and prove those wrong who predicted the demise of our common currency," European Commission President Jose Barroso said after the first session of an EU summit in Brussels late yesterday.
Most European bond markets fell yesterday, as Germany's refusal to boost the current €750bn ($1trn) emergency fund stirred concern that Europe hasn't found the right formula for battling the debt crisis that threatens the euro.
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