Business-Insider

In his speech today, BoE Gov King said "The Monetary Policy Committee will be watching closely indicators of capacity pressures, pricing intentions and inflation expectations. If these indicators remain elevated, the MPC may need to take further action.''

"The recent rise in inflation to over 3 percent does look temporary." It is important that the Monetary Policy Committee look through this short-run volatility and try to understand where inflation might be heading in the medium term.''

The Bank of England forecasts gross domestic product will rise 3 percent in 2007, up from 2.8 percent last year.

"A position in which growth is above its long-run average and businesses are already operating with pressure on capacity is unlikely to be one without inflationary risks''. That is one reason why the Monetary Policy Committee has raised interest rates over the past year.''

Businesses haven't expanded their workforce enough to prevent stronger demand from putting more pressure on capacity, which is ``now at an unusually high level,'' King said. This has encouraged companies to raise prices they charge their customers, which may add to pressure on inflation, he cautioned.

Factory-gate prices climbed for a sixth month in May, growing 0.4 percent after increasing 0.5 percent in April, the Office for National Statistics said in London today.

The "upside shocks'' to inflation haven't been offset by a slowdown in consumer spending, King said. Britons have accumulated a record 1.3 trillion pounds ($2.6 trillion) of debt, spurred by banks' increasing willingness to provide financing.

"Wider and cheaper availability of credit was a `shock' that boosted spending,'' King said, identifying it as a further reason policy makers raised borrowing costs.

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