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
Wednesday 12 November 1997
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.
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