Interest rate hike more likely as inflation makes surprise rise


There is more pressure on the Bank of England to hike interest rates tomorrow after inflation unexpectedly increased in February from 10.1% to 10.4%.

Inflation –the measure of how much goods and services have risen in price over a year – hit a peak in October when it reached 11.1%.

Since then it has been slowly decreasing with the Chancellor Jeremy Hunt forecasting in his Budget speech last week it would fall to 2.9% by the end of the year.

So, data out today which revealed inflation, as measured by the Consumer Price Index (CPI), had taken a turn in the wrong direction has come as a surprise to both experts and consumers alike.

Alice Haine, personal finance analyst at Bestinvest, the DIY investment platform and coaching service, said: “Rising inflation delivers a fresh blow to households that were hoping the financial squeeze was finally starting to ease.

“It means disposable incomes are still very much under threat when you consider the additional challenges posed by higher mortgage costs, falling real incomes, looming tax rises and the prospect that the Bank of England may hike interest rates for the 11th time in a row tomorrow.”

She added: “A rise in inflation coupled with the recent turmoil in the banking sector is raising a fresh set of challenges for the Bank of England, which must now decide whether to push ahead with a widely expected 25 basis point rate hike or put their monetary tightening plans on pause until the banking turbulence passes.

“If the decision is to pause, this could mean inflation stays high for longer as workers benefit from end of tax year pay rises and, for the lucky ones, bonuses too.”

Will they? Won’t they?

Following the recent collapse of Silicone Valley Bank (SVB) and Credit Suisse there had been pressure on the Monetary Policy Committee (MPC) of the Bank of England, which makes the decisions on rate rises, to maintain the base rate at its current level of 4%.

But today’s inflation data may muddy the waters.

Karen Noye, mortgage expert at Quilter said the market had expected inflation to fall into single digits today and said the unexpected increase would leave the Bank of England in a ‘difficult position’ as it may not yet be able to ‘press pause on rate hikes’.

And Rohit Kohli, operations director at Romsey-based mortgage broker, The Mortgage Stop, agreed. He said: “The Bank of England now has a very tough decision to make on Thursday. With recent banking issues, there was a demand to hold interest rates but with these inflation figures, will they be able to?

“The housing market was starting to pick up in recent weeks. Another rate hike tomorrow could cool things down again.

“This will also re-open the debate on the government’s flagship commitment to halving inflation, with no real plan in place when they made it. What ability or control do they actually have to deliver on it?”

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