Interest rates look set to rise despite the lowest inflation rate since 1960

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The Independent Online

Inflation tumbled to its lowest level for almost four decades last year, according to official figures published yesterday. Price rose by an average of 1.5 per cent during 1999, the lowest rate since 1960.

Inflation tumbled to its lowest level for almost four decades last year, according to official figures published yesterday. Price rose by an average of 1.5 per cent during 1999, the lowest rate since 1960.

This was despite a surge in December, which took the financial markets by surprise. Inflation rose from 1.4 per cent in November to 1.8 per cent, its highest since March last year. The main factor was higher mortgage payments following recent rate rises, especially in contrast to massive rate cuts at the end of 1998.

The measure targeted by the Bank of England - which excludes mortgage interest payments - came in at 2.2 per cent. This is the ninth successive month it has remained below its 2.5 per cent target. That, combined with a subdued survey from the British Chambers of Commerce, led some to question whether the Bank needed to raise interest rates again. Sir Ken Jackson, head of the engineering trade union AEEU, said the Bank was failing in its duty to pursue a symmetrical target. "If inflation is consistently below 2.5 per cent, that's no better than it being consistently over. This justifies industry's warnings against further rate rises," he said. David Coleman, an economist at CIBC World Markets, said: "It will be interesting to see at what point a continual undershoot prompts a rethink on monetary policy."

A breakdown of December's data highlighted the difficulty the Bank faces in controlling potential inflationary pressures at a time when inflation itself is at a historic low. The MPC has raised rates three times in the last five months - in September, November and January - and is expected to do so again at next month's meeting.

The split between falling goods prices and rising service sector inflation has widened. Goods prices rose 0.3 per cent, the lowest since the series began in 1998, while services inflation was steady at 3.9 per cent.

"The MPC will use the persistence of service sector inflation to support further interest rate increases," said Adam Law, of Barclays Capital. But Richard Iley, of ABN Amro, said the outlook remained benign: "Sub-target inflation, an appreciating currency and little evidence the economy is continuing to accelerate will prevent the MPC from raising rates aggressively."

The British Chambers of Commerce said its survey for the final quarter of 1999 showed growth in the economy levelling off. Ian Peters, deputy director general, said: "This is a reflection of the rises in interest rates and the strength of the pound."

The survey showed increases in home orders in both manufacturing and service sectors, and an increase in export orders placed with manufacturers. More businesses in both sectors said they intended to raise prices, mainly reflecting higher raw materials costs.

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