Rates held in spite of price inflation fears

Julian Harris
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INTEREST rates were held for the UK and the Eurozone yesterday, despite rising inflation in both areas.

Historically low rates were maintained by the Bank of England (0.5 per cent) and the European Central Bank (ECB), which kept Euro area rates at one per cent.

Inflation in the UK rose to 3.3 per cent in November, and is forecast to hit four per cent early this year – double the Bank’s target rate.

Price increases for December are due to be revealed by the Bank on Tuesday next week.

In the Eurozone consumer price index (CPI) inflation has risen to 2.2 per cent, surpassing the ECB’s target of just below two per cent.

UK interest rates have been at 0.5 per cent since March 2009, yet there are signs that the monetary policy committee (MPC) may begin tightening soon.

Minutes for December’s meeting revealed a more hawkish tone among the committee. Andrew Sentance, who has persistently called for a small rise in rates, has been hopeful that fellow members of the committee will begin to join him endorsing a 0.25 per cent increase.

Towards the end of the month, on 26 January, the Bank will reveal if any of the committee’s nine members joined Sentance in voting for a hike.

Last month senior Bank official Paul Fisher made headlines by revealing the MPC would like to normalise rates to around five per cent, although “the speed at which that happens is another thing entirely,” he said.

“What we need to do is to trigger the mindset in people that that’s where rates will eventually go back to,” Fisher added.

“The MPC could decide that a small near term interest rate hike would support its credibility,” commented IHS Global Insight’s Howard Archer.

And markets reacted yesterday to comments by ECB president Jean-Claude Trichet, who cited “short term upward pressure on overall inflation,” sparking concern that Euro rates could rise in coming months.

The pan-European FTSEurofirst 300 index of top shares closed 0.6 per cent lower at 1,157.34 points after jumping 1.5 per cent on Wednesday.