Bank expected to raise rates again after inflation reaches two- year high

As one mortgage lender reacted yesterday to last week's rise in interest rates, disappointing inflation figures brought warnings that the Bank of England would have to get even tougher. Diane Coyle and Michael Harrison report on the prospect of further in

Headline inflation climbed to a two-year high last month, and the underlying measure moved further away from the Government's target, according to new figures published on the eve of the Bank of England's quarterly Inflation Report. Most City commentators predicted that the Bank's Monetary Policy Committee (MPC) will raise interest rates again to be sure of squeezing the economy enough to bring inflation back on course.

One leading economist warned business leaders gathered for the Confederation of British Industry's conference that the cost of borrowing might have to go as high as 8 per cent to choke off inflationary pressures. Gavyn Davies, chief international economist at Goldman Sachs, said there was no evidence that the breakneck economic growth was slowing, that capacity utilisation was rising and skills shortages were spreading.

"I conclude from all this that the Bank was right to raise base rates last Thursday and that there is a strong case for further increases in base rates over the next six months," he said.

He was joined by other experts reacting to yesterday's disappointing figures. David Bloom of James Capel said: "The MPC will have little choice but to continue on a course of interest rate tightening."

At the CBI conference, the Prime Minister defended last week's quarter- point rise in base rates. Speaking via video link, Tony Blair said he knew it was hard to have interest rate rises and consequent pressure on the pound. But he added: "Better to have interest rate rises now - still at 7.25 per cent - than to go back to the early Nineties when they were at 15 per cent for a year."

Retail price inflation rose to 3.7 per cent last month, its highest since September 1995. With the September and October headline rates the most commonly used as a basis for pay claims in the all-important January round, analysts expressed concern that inflation approaching 4 per cent could lead to significantly higher pay settlements next year.

Figures due today on unemployment and average earnings will be eagerly scrutinised for any signs that the tight jobs market is already causing wage pressures.

The underlying measure of inflation, excluding mortgage interest payments, rose to 2.7 per cent in October, moving further away from its 2.5 per cent target.

The last round of mortgage increases explained part of the rise in the headline inflation rate. The housing component of the RPI was up 9.2 per cent in the year to October. But other prices, included within the target measure, picked up too. Food prices accounted for much of the increase, with vegetables such as mushrooms and cauliflowers up in price due to the weather. In addition, the prices of a range of services continued to accelerate. If the regulated utilities prices are excluded, inflation in the service sector was 4.3 per cent compared with 3.1 per cent in the same month last year.

Adair Turner, the director-general of the CBI, said he was convinced the actions being taken by the Government were the correct ones to ensure long-term economic stability. But the CBI stuck by its view that interest rates below 7.5 per cent were high enough to keep within the inflation target.

However, the weight of opinion, even among those who think it would be unnecessary, pointed towards further rate rises in the new year. This helped the pound rise yesterday, although sterling had already been boosted by a weak yen. It ended around two pfennigs higher at DM2.91, and the sterling index climbed 1.1 to 103.8.

Start your day with The Independent, sign up for daily news emails
News
peoplePair enliven the Emirates bore-draw
Arts and Entertainment
tvPoldark episode 8, review
News
Britain's opposition Labour Party leader Ed Miliband (R) and Boris Johnson, mayor of London, talk on the Andrew Marr show in London April 26
General electionAndrew Marr forced to intervene as Boris and Miliband clash on TV
News
news
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Business Analyst - Financial Services - City, London

£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

Day In a Page

General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence
Public relations as 'art'? Surely not

Confessions of a former PR man

The 'art' of public relations is being celebrated by the V&A museum, triggering some happy memories for DJ Taylor
Bill Granger recipes: Our chef succumbs to his sugar cravings with super-luxurious sweet treats

Bill Granger's luxurious sweet treats

Our chef loves to stop for 30 minutes to catch up on the day's gossip, while nibbling on something sweet
London Marathon 2015: Paula Radcliffe and the mother of all goodbyes

The mother of all goodbyes

Paula Radcliffe's farewell to the London Marathon will be a family affair
Everton vs Manchester United: Steven Naismith demands 'better' if Toffees are to upset the odds against United

Steven Naismith: 'We know we must do better'

The Everton forward explains the reasons behind club's decline this season
Arsenal vs Chelsea: Praise to Arsene Wenger for having the courage of his convictions

Michael Calvin's Last Word

Praise to Wenger for having the courage of his convictions