Rates dilemma as inflation remains above BOE target

● Unchanged March reading caused by timing of Easter break and lower air fares

Bankofenglandpolicymakers will remain under pressure to consider a hike in interest rates before the end of the year, economists yesterday warned, despite a pause in inflation.

Official figures revealed that the consumer price index (CPI) measure of inflation stood at 2.3 per cent last month, in line with February’s outcome after a sharp rise from January’s reading of 1.8 per cent.

However, the rise in the cost of living remains above the Bank of England’s 2 per cent target, putting pressure on the central bank’s monetary policy committee (MPC) to raise interest rates beyond their current record low of 0.25 per cent over the coming months.

Experts said the unchanged reading for March was likely to prove temporary with fresh price hikes, including higher utility bills, set to push CPI upwards this month.

While the Bank of England sees inflation peaking at about 2.8 per cent in the first half of 2018 before falling back, some forecasters predict it could creep above 3 per cent.

Peter Ashton, managing director of foreign exchange provider Eiger FX, said: “The ‘will they/won’t they’ question about the Bank of England’s attitude to raising interest rates remains unanswered.

“Ultimately it’s a matter of when, not if, rates rise. With oil prices spiking in the wake of the US attacks on Syria and the weak pound continuing to ratchet up import costs, inflationary pressure will continue to build.

“For now the doves hold sway on the Bank’s rate-setting committee, but with each month that inflation remains above target that stance will look less tenable.”

Stephen Boyle, chief economist at Royal Bank of Scotland, said that with manufacturers’ input prices growing at close to 18 per cent year-on-year, CPI would rise further in the coming months.

“It’s likely that inflation will move close to 3 per cent in the next few months,” he added. “With wages growing at around 2 per cent people’s disposable incomes will be falling and that means consumer spending will fall unless households either borrow more or dip into their savings.”

But Boyle said that interest rates were “unlikely” to rise in response. “That will only happen if wages start to grow strongly as we try to bolster our spending power and/ or our expectations of future inflation start to rise to levels inconsistent with the target.”

The main downward pressure on the cost of living last month came from air fares, which fell by 3.9 per cent between February and March after jumping by 22.9 per cent last year.

The move was driven by the timing of Easter, with Easter Sunday falling on 27 March in 2016 and on 16 April this year. The cost of flying soars around the Easter holiday period.

Fuel pump prices were also dragging on CPI. Petrol dropped by 1p to 119.2p per litre between February and March and diesel fell by 1.1p to 122.1p per litre over the period. Clothing price tags rose last month.