UK inflation up again, boosting case for rate hike

AP News
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Posted: Mar 22, 2011 7:35 AM
UK inflation up again, boosting case for rate hike

Consumer price inflation in Britain rose to 4.4 percent in February, officials statistics showed Tuesday, higher than the market expected and putting more pressure on the Bank of England to raise interest rates.

The figure immediately boosted the pound, which hit a 15-month high, on expectations the central bank will move to fight inflation earlier than expected. The Bank of England has held its key interest rate at an all-time low for two years due to fears economic growth is still weak, but the acceleration in price increases _ inflation has been above target for 15 months _ is making policymakers nervous.

Adding to the bad news, figures from the Office for National Statistics showed public sector net borrowing was 11.8 billion pounds ($19.3 billion) in February, well above market forecasts of 7.7 billion pounds and narrowing the options for the government a day before it lays out its spending program.

"February's public finances and consumer prices numbers present a distinctly unfavorable backdrop to tomorrow's budget," said Jonathan Loynes, chief European economist at Capital Economics.

"The further rise in CPI inflation from 4 percent to 4.4 percent in February underlines the threat to the future path of the public finances from the squeeze on households' spending power, and perhaps company profits, caused by high inflation," Loynes added.

With two months to go in the fiscal year, borrowing has reached 123.5 billion pounds, more than earlier expected and giving the government less room in its budget for growth-supporting measures.

Consumer spending's contribution to economic growth is likely to be suffering from the value-eroding effects of the high inflation.

The statistics agency said increases in the costs of domestic heating and clothing were the main drivers in pushing the inflation rate above January's reading of 4 percent.

The broader retail prices index rose from 5.1 percent to 5.5 percent, again beating market forecasts.

Despite inflation fears, the Bank of England has held its key rate at an all-time low of 0.5 percent since March 2009. At least three members of the Bank's nine-member Monetary Policy Committee, however, have voted to raise the rate. Minutes of the MPC's March meeting will be released Wednesday will give clues to the trend of the committee's thinking.

After Tuesday's figures, the market moved to price in a higher chance of rate hike in coming months. The pound was 0.5 percent higher at $1.6388, just above its earlier high of $1.6397, which is its highest level since Jan. 19, 2010.

Howard Archer, European economist for IHS Global Insight, said the MPC may hold off on a rate hike in April, waiting to measure the impact of government cuts in spending and employment.

"Signs that consumers are currently reining in their spending is a particular concern," Archer said. Conflict in Libya and the disaster in Japan add to uncertainty about the global economy, and may also make the MPC shy from a rate hike, he added.

The Bank of England's governor, Mervyn King, has argued that British inflation is largely caused by rising prices for oil and commodities, factors which are impervious to national interest rates.