UK inflation up again, boosting case for rate hike

The figure immediately boosted the pound, which hit a 15-month high, on expectations the central bank will move to fight inflation earlier than expected. The Bank of England has held its key interest rate at an all-time low for two years due to fears economic growth is still weak, but the acceleration in price increases — inflation has been above target for 15 months — is making policymakers nervous.

Adding to the bad news, figures from the Office for National Statistics showed public sector net borrowing was 11.8 billion pounds ($19.3 billion) in February, well above market forecasts of 7.7 billion pounds and narrowing the options for the government a day before it lays out its spending program.

“February’s public finances and consumer prices numbers present a distinctly unfavorable backdrop to tomorrow’s budget,” said Jonathan Loynes, chief European economist at Capital Economics.

“The further rise in CPI inflation from 4 percent to 4.4 percent in February underlines the threat to the future path of the public finances from the squeeze on households’ spending power, and perhaps company profits, caused by high inflation,” Loynes added.

With a bit more than a month to be tallied in the fiscal year, borrowing has reached 123.5 billion pounds, more than earlier expected and giving the government less room in its budget for growth-supporting measures.

Consumer spending’s contribution to economic growth is expected to be suffering from the value-eroding effects of the high inflation.

The statistics agency said increases in the costs of domestic heating and clothing were the main drivers in pushing the inflation rate above January’s reading of 4 percent.

The broader retail prices index rose from 5.1 percent to 5.5 percent, again beating market forecasts.

Despite inflation fears, the Bank of England has held its key rate at an all-time low of 0.5 percent since March 2009. Governor Mervyn King has argued that inflation is largely caused by rising prices for oil and commodities, factors which are impervious to national interest rates.

At least three members of the Bank’s nine-member Monetary Policy Committee, however, have voted to raise the rate last month. Minutes of the MPC’s March meeting will be released Wednesday and will give clues to the trend of the committee’s thinking.

Analysts say a rate hike is likely in the next couple of months, though the Bank of England may hold off in April as it waits to measure the impact of government cuts. A key factor will be whether the inflation results in sharp increases in wage settlements — though that has so far not happened, market watchers are worried that could happen soon, embedding high inflation into the economy.

After Tuesday’s figures, the market moved to price in a greater chance of a rate hike in coming months. The pound was 0.5 percent higher at $1.6388, just above its earlier high of $1.6397, which is its highest level since Jan. 19, 2010.