Rise in inflation threatens early base rate cut

by Gill Montia

Story link: Rise in inflation threatens early base rate cut

Expectations that the Bank of England will cut the base rate in March have lessened with the news that the Consumer Price Index rose to a seven-month high of 2.2% in January.

The Index, which is used by the Government as an official measure of inflation, stood at 2.1% in December and has been nudged upward by increases in the cost of fuel and higher food prices.

According to Howard Archer, an economist at Global Insight: “We don’t expect the Bank to cut interest rates again until May, unless it becomes clear that growth is slowing substantially.”

Last week the base rate decreased buy a quarter-point to 5.25%, the cut followed a similar reduction in December and raised hopes that the UK property market would be drawn back from the brink of a crash.

The latest inflation figures are particularly bad news for first-time-buyer households which, according to December figures from the Council of Mortgage Lenders, spent 20.7% of their income servicing their home loan.

The proportion has increased from 17.9% in the same month of 2006.

The Bank of England will publish its quarterly inflation report today and this will be followed next week by the minutes of February’s Monetary Policy Committee meeting.

The minutes will give an indication of the imminence of any further base rate cuts and an insight into the way in which the Committee balances inflationary pressures with the threat of a downturn in the UK economy.