Does inflation rise mean rate rise?

Inflation in the UK, as measured by the Consumer Price Index, rose to 0.5% in March. But will it result in an interest rate rise?

Does inflation rise mean rate rise?

March’s inflation figures showed a higher than expected rise in consumer price data over the past 12 months to 0.5%, resulting in UK inflation reaching its highest level since December 2014. However it is still some way off the Bank of England’s 2% target.

Rising air fares, an increase in the price of clothing and restaurant and hotel bills were the main contributors to the increase. The earlier than usual Easter break is also expected to have played a part. However, any chances of a bigger increase in March’s inflation figure were dampened by falling food prices and smaller rise in petrol prices than a year ago.

Interest rates

So will the rising inflation send a signal to the Bank of England’s Monetary Policy Committee, leading to a renewal of the likelihood of an interest rate rise?

Fidelity’s Maike Currie does not think so: “Today’s increase is unlikely to spur the Bank of England into considering raising interest rates on Thursday with widespread consensus that this week will see the 85th consecutive month that the bank keeps interest rates on hold at their emergency level of 0.50%.

Ben Brettell, senior economist at Hargreaves Lansdown, agrees: “Talk of higher interest rates on the back of today’s data is premature. Although inflation rose by more than expected, the overall trend remains weak, and places little pressure on the MPC.

“Naturally policymakers will need to remain mindful of the risk that inflation overshoots at some point. However, the UK economy is battling a number of significant headwinds at present. Consumer spending, aided by low inflation, low unemployment and rising wages, has been the engine of economic growth lately. But recent surveys suggest consumers reined in their spending in March – perhaps the first sign of nerves ahead of June’s EU referendum.

“All in all, the economic picture remains highly uncertain and I expect no action from Threadneedle Street for some time yet.”

Adrian Lowcock, head of investing, AXA Wealth, welcomes the fact that inflation is coming back but he too feels this won’t lead to a rate rise: “The return of inflation in the UK will be welcome, given many investors were fearing a deflationary spiral at the start of the year as China devalued its currency and Japan introduced negative interest rates.

“However, we do not think this is a signal for the Bank of England to raise interest rates soon. Although the UK economy continues to grow, albeit weakly, the outlook for the global economy is far from healthy. Concerns over China, Europe and Brexit will continue to dominate markets and policymakers’ decisions for now.”

 

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