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Brace yourselves for a hike in rates

Posted by Andrew Hebden on June 17, 2008 2:11 PM | 

Bank of England governor Mervyn King has raised the possibility of consumer inflation soaring to more than 4% before the end of the year.
This is grim news, indeed, even if it was widely expected. But what does it mean for interest rates?

Well the letter from the governor to Chancellor Alistair Darling - prompted by the Consumer Prices Index (CPI) reaching 3.3% in May - doesn't give too much away.
Although he predicts a sharp rise in the rate of inflation, mainly due to growing food and energy prices, in the second half of the year, he also states there are "considerable uncertainties" surrounding this.
He is also forecasting the CPI will return to 2% by 2009, suggesting that the problem of inflation should be seen as a short-term one, although this may prove optimistic on his part.
Mr Darling, clearly desperate to avoid a rate hike in these times of such fragile confidence, responded by calling for restraint in pay awards in the public and private sectors.
One safe conclusion is that an imminent interest rate cut is not on the cards and, if Mr King has his way, then an upward shift cannot be ruled out.

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