Stubborn inflation suggests rate rise on the way in spring

Comment Martin Flanagan

The Bank of England (BOE) has clearly reached a tipping point on a second interest rate rise after its first monetary tightening in ten years last November. The Bank was the lower rates backstop guardian to stop the UK slumping into another Depression following the financial crisis.

But a patient can’t stay in intensive care forever, which is what historically low interest rates are for the economy, when vigour and appetite return. Stubbornly high inflation yesterday, at 3 per cent annually in January for the second month running, and marginally down from a near-six year high in November, adds to the case for another hike this spring.

The Boe’s governor Mark Carney has certainly been managing expectations for such a compensatory rise. Last week came the clear message from the Bank’s monetary policy committee (MPC) minutes that monetary tightening was likely to happen faster and to “a somewhat greater extent” than previously anticipated. The tone of greater rate hawkishness is palpable after the previously longer period of an absence of fluttering in the dovecotes.

Now the City seems to be divided only between those who believe a May rate rise is virtually nailed-on, and those who just believe it is quite likely.

The BOE has raised its UK growth forecasts for 2018 to 1.8 per cent from 1.6 per cent at the time of last November’s inflation report as the economy rides on the back of stronger global demand. Of course, the problematic Brexit negotiations remain an unmistakable “noises off ”, an unpredictable element for the UK economy and accompanying monetary policy. But Carney and co know that rate rises cannot just be put on hold to address the known unknown of the terms of the UK’S exit from the European Union. The BOE has to track and adapt to what is happening now, and on that basis, inflation remains too high and interest rates look too low.