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Stubborn inflation bolsters case for May interest rate rise

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  • 13/02/2018
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Stubborn inflation bolsters case for May interest rate rise
Inflation held steady at 3% in January, raising expectations the Bank of England will lift interest rates in the first half of 2018.

 

The cost of living remained well above the Bank’s 2% target at the start of the year, as measured by the Consumer Prices Index (CPI).

Price rises were driven by clothing, footwear and recreational goods and services, data from the Office for National Statistics (ONS) today showed.

The Bank’s Monetary Policy Committee (MPC) last week said it is set to bring inflation back to the 2% target faster than previously expected.

Raising interest rates helps put the brakes on surging inflation.

The base rate was raised for the first time in a decade to 0.5% last November.

As a result of high inflation and strong economy growth, many economists are now gearing up for another increase in May.

Ben Brettell, senior economist at Hargreaves Lansdown said: “Inflation’s now been above target for 12 straight months. This adds further weight to the case for higher interest rates sooner rather than later.

“The Bank’s rhetoric last week echoed that of September’s meeting minutes, which preceded last November’s rate hike, and it now looks like the next rise may well happen in May.

“It seems domestically driven inflation could seamlessly take over from the sterling-related price rises we’ve seen since the Brexit vote.

“If this is the case, some tightening of monetary policy looks increasingly appropriate.”

Jacob Deppe, head of trading at online trading platform, Infinox added: “Stubbornly high inflation in the months ahead will only strengthen the argument for a rate hike in May and possibly one, if not two, further rate hikes before the end of the year.”

However, not all analysts think a Spring rate rise is certain.

Nick Leung, research analyst at WisdomTree in Europe said: “Against a backdrop of absent real wage pressures, subdued consumer confidence and Brexit uncertainty, we expect the Bank of England to err on the side of caution and proceed with a slow path to higher interest rates.”

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