Inflation remains stubbornly above target, according to latest official statistics. And that’s bound to lead to speculation about interest rate rises.
The Consumer Prices Index (CPI) fell by just 0.1 percent in July, leaving the annual rate at 3.1% – well above the government’s 2 % target. Bank of England governor Mervyn King has admitted to surprise. The governor has long argued that inflation will drift down as temporary factors, such as fuel price increases, drop out of the picture. Now, according to the Bank, the planned VAT rise will help keep inflation above 2% throughout next year.
Minutes from this month’s meeting of the Bank’s Monetary Policy Committee show rate-setters again divided. One member, Dr Andrew Sentance, again voted for a small increase in interest rates.
Many looking to buy or remortgage their homes are bound to take the view that higher-than-expected inflation could lead to a rise in rates before long. It’s that perception which has been fuelling the popularity of fixed-rate deals recently, as borrowers seek certainty about future payments.
However, many economists believe that the Bank’s base rate will stay at its historic low for many months to come. Surveys, and the Bank’s own forecasts, show signs of slowing growth – as budget measures take effect and spending cuts bite. With earnings growth low and plenty of spare capacity in the economy, there will be downward pressure on prices. One group of forecasters, Ernst & Young’s ITEM club, has even suggested it could be years before rates need to rise.
Likewise, business groups continue to argue against a rise in interest rates. British Chambers of Commerce chief economist David Kern has said that any premature rate rise could trigger a damaging economic setback.
Tags: Business, Economy, Housing Market
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