–Adds Detail To Version Transmitted At 1030 GMT

LONDON (MNI) – The Bank of England Monetary Policy Committee’s best
judgement is that inflation will fall to around its 2.0% target by the
end of this year, BOE Governor Mervyn King said in a letter published
ahead of Wednesday’s Inflation Report.

King said the pace and extent of the CPI fall was “highly
uncertain” and he highlighted some of the key uncertainties surrounding
the outlook. These included developments in the euro area along with
wage pressures in the labour market and firms attempts to rebuild
profit margins.

The latest inflation data showed CPI fell to 3.6% on the year in
January having peaked at 5.2% back in September. The BOE Governor set
out the reasons why further declines are likely to push CPI back to its
2.0% target.

“In coming months, that further moderation is likely to reflect the
declining contributions from petrol prices and any remaining VAT impact,
together with recently announced cuts to domestic energy prices,” King
said.

“The upward pressure from past rises in energy and import prices
should dissipate further over 2012, and the margin of spare capacity
that has built up in the economy is likely to continue to bear down on
wages and prices beyond that,” he said.

The MPC voted to increase quantitative easing by Stg50 billion at
its February meeting despite CPI running 1.6 percentage points above
target.

In his letter to Chancellor of the Exchequer George Osborne King
sketched out the MPC’s thinking at that meeting.

“The key consideration when setting monetary policy is … the
medium term outlook for inflation and the balance of risks around it
rather than its current rate,” King said.

“With external price pressures diminishing and the underlying
weakness in domestically generated inflation likely to persist, the
committee’s assessment of the inflation outlook at its February meeting
was that, in the absence of further policy action, the balance of risks
around the inflation target lay to the downside,” he said.

In his reply to the Governor Osborne reaffirmed his belief that
monetary policy has a central role to policy in rebalancing the UK
economy – towards export led, and away from domestic consumption led,
growth.

“Although inflation is now falling broadly as expected the process
of rebalancing has a long way to go,” Osborne said.

“Monetary policy has a critical role in supporting this
rebalancing. It is the first line of defence in the face of economic
shocks,” Osborne said.

He added that the government had an “absolute commitment” to
reducing the budget deficit and getting the public finances back on a
sustainable path in order to allow “monetary policy to stay looser for
longer.”

–London newsroom: tel+44 207 862 7491; email: drobinson@marketnews.com

[TOPICS: M$$BE$]