World Clock

Wednesday, 16 February 2011

Inflation Report (CPI & RPI) Fuel MPC Hawks Case for a Interest Rate Rise - UK

Yesterday saw the rate of Inflation or the Consumer Price Index (CPI) in UK rise to 4%, a jump from 3.7%. The Retail Price Index (RPI) saw another increase to 5.1% from 4.8%, this combined with the recent in VAT is putting significant strains on the public purse. RPI, also include the interest repayment on mortgages.

Both of these statistics will put increasing pressure on the Bank of England to raise interests rates in order to curb accelerating inflation. An oddity in the UK is that when the UKs is that Bank of England Governor is required to write a letter to the Chancellor of the Exchequer when the CPI figure exceeds the target rate of 3%. This is now the third such letter that Mervyn King has written to Chancellor.

The letter highlighted that Mervyn King expects inflation to rise to around 5% in the coming months, giving further ammunition Monetary Policy Committee (MPC) policy hawks to raise interest rates. However Mervyn King remains defiant, saying that interests rates should remain on hold, saying that he expects inflation to fall back "so that is about as likely to above the target as below the target in the next two to three years. The UKs interests rate currently stands at 0.5%, an historic low.

(see video below for Mervyn King's response to this latest inflation report)

Mervyn King also cites three reason for sharp rise in inflation;

  1. VAT rise
  2. the past weakness in the pound
  3. & the recent rise in commodity prices 
There has already been political fallout from the latest round of CPI/RPI data, commenting on Radio 5 live Ed Balls the newly appointed Shadow Chancellor (Labour) said that the rise in VAT was a mistake. George Osborne the Conservative Chancellor has said the rise in VAT was a necessity in the order for the UK to put its fiscal house in order, citing Labours decision to cut VAT temporarily to 15% last year.

While there is growing pressure on the MPC to vote for an interest rate rise, analysts say the they should hold off until the governments austerity (cost-cutting) measures are fully in place. Perhaps the strongest argument against raising rates now is that the UKs latest GDP figures showed a decline of -0.5% in the final quarter of 2010 - this was before the rise in VAT was put into place.

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