Daily Archives: February 16, 2010

High inflation in Britain is a temporary phenomenon, says Mervyn King in a letter to Alistair Darling to explain the current annual CPI rate of 3.5 per cent.

Three short-run factors have driven up the current rate, he says: (1) the restoration of VAT to 17.5 per cent; (2) oil prices rising by about 70 per cent over the past year; and (3) the fall of the pound in 2007-8 is feeding through to consumer prices. 

The central bank of Sri Lanka has held the repo rate at 7.5 per cent, as the economy shows signs of returning health. Rates offered by banks to the public – averaging about 15 per cent in December – are beginning to fall, and credit became more available (in nominal terms) at the end of last year. Inflation is interesting: year-on-year inflation rose steeply from 4.8 at the end of 2009 to 6.5 per cent in January, but the annual average inflation fell to 3.1 per cent. Annual average inflation – slower to change and less affected by what happened this month last year – has fallen from 21.6 per cent this time last year, a remarkable achievement.

Portuguese central banker Vitor Manuel Ribeiro Constancio has been chosen by a “unanimous” and “quick” vote of finance ministers from the 16 eurozone countries. Mr Constancio will replace Lucas Papademos when his eight-year term ends on May 31. Luxembourg’s Yves Mersch and Belgium’s Peter Praet had also been on the ballot for the vice presidency.

Mr Constancio’s reputation as a “dove”, who pays more attention to economic growth than some of his ECB colleagues, increases the likelihood that Axel Weber, an anti-inflation “hawk”, will be chosen to replace ECB President Jean-Claude Trichet when his term ends on October 31, 2011. Had ministers picked Mr Mersch, a tough inflation fighter, the chances of Italy’s Mario Draghi replacing Mr Trichet would have risen (from Bloomberg