Interest rate hike looms as inflation soars

Julian Harris
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THE BANK of England risks missing its inflation target for most of the next two years, it admitted yesterday, raising expectations that it will hike interest rates this year.

Consumer price inflation is “more likely than not to remain above the target throughout 2012,” the Bank said in its Inflation Report, launched yesterday. The consumer price index came in at four per cent in March, twice the Bank’s two per cent target.

“There is a good chance that inflation will reach five per cent later this year,” the Bank, led by governor Mervyn King (pictured), now fears.

New projections show inflation easing to the two per cent rate around March 2013, assuming interest rates rise at levels expected by the markets.

If rates do not rise, inflation “is more likely to be above target than below it”, even two years ahead.

The market expectations used by the Bank include a rate hike this year, despite dovish anticipations prior to the report’s publication.

“This report hints at risks of earlier rate hikes,” said ING’s James Knightley.

Downbeat news on first-quarter growth in recent weeks had caused markets to push back their expectations for the BoE’s first rate rise since 2007 into next year.

But sterling overnight interest rate swap rates showed markets almost fully pricing a rate hike in November, and fully by December, although many economists expect an earlier move.