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Banks (Finance)

Inflation Hits 4%: Bank of England Faces Pressure to Raise Interest Rates

Strategic Insights

— 2 min read

The prospect of an interest rate rise this spring has increased as the cost of living in the UK rose to 4% last month, its highest annual inflation rate in over two years and twice the Bank of England's target. Bank of England governor Mervyn King has admitted that the rate-setters on the monetary policy committee (MPC) are deeply divided over whether to increase rates, but hinted that an early rate rise could be in the offing. The Bank is under pressure to defend its inflation-fighting credibility, with many economists predicting a rate hike in the coming months.

Key Takeaways:

  • The cost of living in the UK rose to 4% last month, its highest annual inflation rate in over two years and twice the Bank of England's target.
  • Bank of England governor Mervyn King has admitted that the rate-setters on the MPC are deeply divided over whether to increase rates.
  • King hinted that an early rate rise could be in the offing, citing rising inflation as a key driver.
  • The Bank is under pressure to defend its inflation-fighting credibility, with many economists predicting a rate hike in the coming months.
  • Inflation is likely to reach between 4% and 5% over the next few months, "appreciably higher" than when King last wrote to the chancellor three months ago.
  • The two main factors contributing to the rise in inflation are the surge in oil prices and the VAT rise.
  • Annual inflation measured by the retail prices index rose to 5.1% in January from 4.8% in December.
  • Families face the biggest squeeze on spending power since the 1920s, with inflation-adjusted wages no higher than in 2005.
  • King's comments led some economists to revise their rate prediction, with Nomura's UK economist Philip Rush forecasting a rise in May and Barclays Capital's chief UK economist Simon Hayes reviewing his rate prediction.

Statistics:

  • The cost of living in the UK rose to 4% last month, its highest annual inflation rate in over two years.
  • Inflation is twice the Bank of England's target of 2%.
  • The two main factors contributing to the rise in inflation are the surge in oil prices (4.4% between December and January) and the VAT rise.
  • Annual inflation measured by the retail prices index rose to 5.1% in January from 4.8% in December.
  • The Bank of England's MPC is divided over whether to increase rates, with some members supporting a quarter-point rise in January.

Sources:

  • The Guardian: "Mervyn King hints at early interest rate rise" by Julia Kollewe
  • The Telegraph: "Bank of England governor Mervyn King admits divisions over interest rates" by Philip Aldrick
  • BBC News: "UK inflation rises to 4% in January"

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