UK's Cameron says rising inflation a concern - Reuters UK

LONDON | Sun Jan 9, 2011 11:11am GMT

LONDON Jan 9 (Reuters) - British Prime Minister David Cameron said on Sunday he was concerned about a rise in inflation but expressed his support for Bank of England Governor Mervyn King.

"If you look at the recent (inflation) figures, they are concerning because they are well outside what the Bank of England is meant to deliver," Cameron said on BBC TV's Andrew Marr show.

"Inflation is extremely harmful, it destroys people's savings, we don't want to go back to having an inflation problem as we had in the past," he added.

Cameron said 2011 was going to be a difficult year for Britons as cuts in state spending introduced by his Conservative-led coalition take effect.

But he said action was needed to cut a deficit which is running at in excess of 10 percent of national output.

Inflation was at least a percentage point above the Bank of England's 2 percent target throughout 2010 and is forecast to approach 4 percent early this year after an increase in VAT sales tax took effect last week.

The BoE sets interest rates independently and faces a dilemma over whether to raise rates from a historic low of 0.5 percent to curb inflation at a time when spending cuts are weighing on a fragile economy.

Cameron praised King, the head of the central bank, despite the inflation overshoot.

"I think Mervyn King is an excellent bank governor and I think he has done a very good job," he added.

Cameron said he thought the system whereby the central bank was free to set interest rates, introduced under a Labour government in 1997, was a good one.

"I think it is right that this is for the Bank of England to decide. We have an independently set monetary policy and by and large they have done a good job."

"I worked in the Treasury when the Bank of England didn't have that responsibility and when ministers set interest rates and I have to say I do not want to go back to those days." (Reporting by Keith Weir; Editing by Greg Mahlich)