The Office of National Statistics has just released its report on consumer inflation in the U.K. and the numbers are causing a dilemma for the Bank of England’s monetary policy committee. At present the base rate is holding at 0.5%, where it’s been since March of 2009, but inflation has gone from 3.3% in November to 3.7% in December, and looks to keep going if no controls are put in place, i.e. a rise in interest rates.
Professor Peter Spencer of the Ernst & Young ITEM Club said that the MPC should “stick to their guns” and not let pressure from the government push them into raising the rate prematurely. He said the inflation rate will slow after the initial impact of the increase in VAT to 20%, and that an increase in the Bank’s interest rate at this time would negatively affect the overall economic recovery.
The rise in the CPI (Consumer Prices Index) to 3.7% is more than the Bank had predicted for the first part of 2011, and the committee is required to write to the Chancellor when it goes above the target level of 2%. David Cameron recently stated that the inflation rate was a major concern, indicating that the Bank needs to step in to raise its rates in order to control the trend. A rise in the interest rate would be a relief to the huge number of savers in the U.K. who have been hit hard by current low rates of return.