A renewed warning that inflation-busting pay deals will stoke inflation and force the Bank of England to keep interest rates higher, for longer, was issued today by Professor Tim Besley, the most hardline member of its rate-setting Monetary Policy Committee.

His comments come ahead of minutes due tomorrow of the MPC’s meeting earlier this month at which it kept interest rates on hold at 5 per cent. Prof Besley himself voted for a quarter-point rate rise in July, and many City economists believe that he may have done so again a fortnight ago.

Prof Besley said that “all being” well, present high inflation, which hit 4.4 per cent last month and is set to rise to 5 per cent or more, “will fall again next year and be much closer to the 2 per cent target by the end of 2009”.

But he added: “That will only happen if people don’t chase inflationary wage increases.”

Writing in The Sun, Prof Besley, an external member of the Bank’s Monetary Policy Committee, added that everyone wanted to protect their stanard of living against rising costs. “But if everyone does it, prices will just go up again as businesses try to cover their higher costs. Then we will all be back at square one, but with inflation still high.”

Prof Besley said the combination of rapidly weakening growth and rising inflation meant that it was not easy for the Bank to get its interest rate decisision right, “particularly now”.

He hinted that he is in little hurry to back a rate cut to bolster growth so long as price pressures persist, since any threat of rising pay demands stoking inflation had to be “nipped in the bud”. “That means having interest rates at a suitable level until the threat of higher inflation has passed,” he said.

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