Rate increase fear as inflation jumps

17 April 2007

Economists are predicting that the Bank of England will raise interest rates again next month – after UK inflation jumped to 3.1%. 

The Consumer Prices Index – by which the Government measures inflation – jumped to 3.1% in March, up from 2.8% in February.  This is more than one percentage point above the Government’s target of 2%. 

Because of this, the Governor of the Bank of England was forced to write a letter of explanation to the Chancellor, Gordon Brown, explaining why it had happened.  In his letter, Mervyn King said that inflation had risen above 3% in March because of rising oil prices which, in turn, pushed up the cost of petrol.  He also said that the cost of food and furnishings had gone up.

Mervyn King also stressed that he was “determined” to bring inflation back down to its target of 2%, which means that interest rates – and many people’s mortgages – will go up. 

The Bank of England has raised interest rates three times since last August, in a bid to curb inflation.  Last month it voted to keep rates on hold at 5.25%, but following the latest set of inflation figures, analysts now expect another hike next month, to 5.5%, and possibly higher.

Economist Howard Archer said:  “This is a thoroughly nasty set of data that essentially guarantees that the Bank of England will raise interest rates by a further 25 basis points to 5.5% in May.  Furthermore, there is still a markedly increased possibility that interest rates will rise further still further out.”