Inflation fuels calls for rates rise

The Bank of England is under renewed pressure to raise interest rates after latest figures showed inflation has risen to 4 per cent, double the government’s target.

The Consumer Price Index (CPI) rate of inflation hit 4 per cent in January, up from 3.7 per cent in December, as the increase in VAT and the soaring cost of crude oil pushed up the cost of living.

The Bank of England Governor, Mervyn King, admitted in a letter to Chancellor George Osborne that there was a “great deal of uncertainty” over the inflation outlook and there were “real differences of view” among the Bank’s policymakers.

Economists called into question the Bank’s credibility as the Governor confirmed inflation was likely to pick up to between 4 per cent and 5 per cent over the months ahead.

The City will now look to the Bank’s quarterly inflation report for further insight into its stance on interest rates.

Any rise in interest rates would be bad news for borrowers at a time when tax increases on VAT, fuel and National Insurance have already hit many middle-earners in the pocket.

However, a rise could provide some relief to those who depend on their savings and who have suffered record low interest rates since last year.

The level of inflation is causing more concern than usual, because it is not being fuelled by salary rises, but increases in the cost of food, furniture, alcohol, fuel and other goods.

The average price of petrol hit a record high of 127p per litre in January, the Office of National Statistics (ONS) said.

The fact that salaries were not driving inflation was used as a reason by Mr King last month not to increase interest rates, but yesterday’s inflation figures piled further pressure on the Monetary Policy Committee (MPC) to act, as well as raising questions about the government’s economic strategy.

Last night, City analysts suggested a 0.75 per cent interest rate rise could be on the cards.

Neil Prothero, at the Economist Intelligence Unit, said: “Having known the CPI figure ahead of last week’s rate decision, the Bank of England’s official stance will be to continue to blame ‘temporary’ factors of sterling depreciation, the VAT hike and rising commodity prices.

“But with inflation having exceeded 3 per cent in 24 of the past 34 months, the credibility of this argument is wearing thin.”

Mr King said the high level of inflation was down to the rise in VAT, the low value of the pound and rising energy prices.

He said: “There is a great deal of uncertainty about the medium-term outlook for inflation.

“And I do not wish to conceal there are real differences of view within the committee, reflecting different judgments about the risks to that outlook.”

In response to the Bank Governor’s letter, George Osborne pointed out that stepping back from the current programme of austerity measures would put upward pressure on inflation.

The Chancellor added: “For its part, the government’s commitment to delivering its fiscal consolidation plan continues to provide the Monetary Policy Committee with the space it needs to target low inflation.”

The British Chambers of Commerce believes inflation will rise to 4.5 per cent before it stabilises and has warned that the MPC should delay any rate rise until the impact of the government’s austerity measures are clear.

But Alan Clarke, economist at BNP Paribas, says the base rate may now rise in the coming months. “My own view is that it will be just after the summer, but increasingly it’s looking more likely it could happen sooner rather than later – but maybe as soon as May.”

Labour and the unions claimed that the inflation figures showed a failure in government economic policy, with the economy also teetering on the edge of going into recession after negative growth figures published last month.

Shadow Chancellor Ed Balls said the economic picture in the UK was the “worst of all worlds”.