Inflation surprise makes Bank of England rate rise almost a certainty
Victory is delayed. Inflation had been expected to fall below 10% but there was a shock on Wednesday morning when that didn’t happen, after the annual growth in food and nonalcoholic beverage prices unexpectedly jumped in March to its highest level since 1977.
Fresh fish, cooking oil and biscuits all rose in price to push up the overall annual increase in food bills from 18% in February to 19.1% in March.
Inflation is still on track to halve by the end of the year – allowing ministers to boast of its near defeat – because the full effect of a drop in wholesale gas prices has yet to feed through into the overall rate. Along the same lines, policymakers at the Bank of England are expected to say when they meet next month that inflation remains on course to slide below its 2% target next year.
However, City economists agree that while inflation is now back on a downward trajectory – dipping to 10.1% in March after a surprise rise to 10.4% the previous month – there is a 97% chance the central bank’s monetary policy committee (MPC) will increase interest rates one more time in May.
The MPC is likely to be unmoved by the plight of mortgage payers when a majority of its nine members vote for an increase of 0.25 percentage point in the base rate to 4.5%.
If they are to come close to eventually achieving their target of annual prices growth of 2%, the rate-setting committee believes its only recourse must be to increase borrowing costs and further dampen consumer spending. Only then does it expect shops to begin to restrict price increases.
There is another factor weighing on the MPC – the ugly comparison with inflation among the UK’s main competitors. In the eurozone it stands at 6.9% and only 5% in the US.
Kitty Ussher, the chief
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