Wed 31st Jan, 2007
Inflation Rate at 11 Year High
One week after being hit by a surprise interest rate increase, city analysts were predicting that the inflation rate for December will be close to 3 per cent, an 11 year high. November 2006 was the seventh consecutive month it was above the 2 per cent target.
The Bank of England’s has set a target rate of 2 per cent. If the inflation rate does rise above 3 per cent, Governor Mervyn King will need to write a letter of explanation to the government, the first time since the Bank gained independence in 1997.
Mr King will also need to predict how long it will be before the inflation rate returns to the 2 per cent target and how the Bank of England expects to meet the Government’s monetary policy objectives.
The latest Consumer Prices Index (CPI) for December was known by the Bank of England and was the catalyst for the recent interest rate increase of .25 percent, to 5.25 per cent.
Malcolm Barr, of JP Morgan Chase Bank, and ING economist, James Knightley, expects the figure to reach 3 per cent,
Investec economist, Philip Shaw, who initially predicted a modest 2.8 per cent has since admitted there is an “upward risk”, which may see it rise as high as 3.1 per cent.
He said: “It is fairly easy to see it going up to 2.9% or 3%, but 3.1% is also possible, although you’d need a huge surge in food prices in particular to get that sort of jump.”
All of this is stressing news for the loan industry and the housing market, as it points to future interest rate increases, some predict as early as March.