Bank of England may reconsider plan to pump cash into the economy

Money markets were rocked yesterday following an unexpected rise in inflation and an announcement from the Bank of England that it may reconsider its plan to pump extra cash into the economy.

The Office for National Statistics announced that inflation, as measured by the Consumer Price Index, rose from 3% to 3.2% in February, instead of falling as economists expected.

The news prompted the publication of a fifth letter of explanation from Bank of England governor Mervyn King to the chancellor.

King also indicated before the Treasury Select Committee that he could hold back from spending the full £75bn the Monetary Policy Committee had pledged to spend on quantitative easing should the economy and inflation recover sooner than expected.

Gilt prices were sent plunging as a result of the combined announcements, with their yields soaring, as investors speculated that the Bank might buy fewer government bonds in coming months.

Gilt yields were up by basis points to 3.34% by late trading, their biggest one-day rise since October 1998, when markets reacted to the Federal Reserve-designed rescue of long-term capital management.

The pound also soared higher against all other major currencies, rising 2_ cents against the dollar, as traders responded to the possibility that interest rates could have to be raised to combat inflation.