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BoE's Tucker wants 'gradual' rate change

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Date: Thursday 03 Apr 2008

LONDON (ShareCast) - The Bank of England’s Paul Tucker appeared to cool expectations that UK interest rates will fall next week, as he called for a more gradual change in borrowing costs in the face of rising inflation.

“The broad policy strategy is to offset some but not all of the adverse shock to demand from tighter credit conditions,'' said Tucker, head of markets at the central bank, in a speech in London.

“And to do so by changing bank rate gradually and with transparency about that broad strategy,” added the Monetary Policy Committee member.

The BoE is being urged to chop interest rates next Thursday by a quarter point to 5% in order to soothe the country’s economy as the credit crunch continues to bite.

He says the Bank is prepared to put up with slower growth as long as inflation, which it fears could hit new records, is kept under control.

"This approach probably means allowing a degree of slack to develop in the economy, in the interests of avoiding taking risks with inflation on the upside," he said.

“If…we were to adopt a course that let the inflation genie out of the bottle, we would find ourselves needing to tighten policy, exacerbating the slowdown in activity,” said Tucker.

“At the Committee's March meeting, I judged that an immediate further cut, following February's, might very easily have been misunderstood as a change of strategy away from the one focused on the medium-term outlook for inflation that I have spelled out this evening,” he said.

“My own vote at the April meeting will depend on all the data, some of it still to reach us, since then.”

Data released today by the Chartered Institute of Purchasing Supply has revealed that Britain’s service sector slowed more than expected last month as price inflation hit a 12-year high.

The purchasing managers index tumbled to 52.1 in March, its lowest in four months and down from 54 in February, as input prices index surged from 65.8 to a record high of 66.2.

“The increase in inflation was characterised by higher energy and fuel bills with the price of foodstuffs and labour also reported to have risen,” said the survey.

Meanwhile, the business expectation index fell to 65.8, just off January’s 6½ year low.