Inflation Creeps Up To Dash Rate-Cut Hopes

The base rate cuts by the Bank of England in December and February have given people hope that there may be two or three more throughout the course of 2008. The trouble is that the Bank always has to remember its primary objective – and that is to keep inflation down to around 2%.

The bad news for people hoping for further interest rate cuts is that the Government’s preferred measure, Consumer Price Index (CPI), crept up again in January to 2.2%.

This is highest level since June last year (2.4%), but not as bad as some analysts were forecasting; some thought it would go back to that June level.

This gives the Bank a problem, as it would obviously like to keep pulling down the base rate to re-ignite the economy, but with inflation on the rise again, it is unlikely that Governor Mervyn King and the rest of the Monetary Policy Committee will bring base rate down again.

Sterling traders saw this as good news and, as they bet on no rate cut until early summer, the pound moved up nearly a fifth of a cent.

James Knightley of ING said: “We are likely to see CPI push above 2.5% in the next two or three months. This will keep the Bank cautious on inflation, suggesting the gradual policy easing stance will remain in place. Nonetheless, with the growth outlook continuing to deteriorate we still see the policy rate falling to 4.5% by the year-end.”

The Bank of England has cut the base rate from 5.75% to 5.25% over the last three months. The US Federal Reserve has slashed its interest down to 3%, but such drastic action would be highly unlikely in the UK.

Meanwhile, the broader measure of inflation, the Retail Prices Index, which includes mortgage bills, edged up from 4% to 4.1%.