Market jitters, fueled by the collapse of Silicon Valley and Credit Suisse, have left markets divided over whether Threadneedle Street will continue with 10 consecutive rate hikes. However, yesterday’s spike in inflation, with the CPI rising from 10.1% to 10.4% in the year through February, put pressure on the Bank to raise interest rates.
The US Federal Reserve also raised interest rates by 0.25 points overnight, meaning traders will be surprised if UK interest rates do not follow suit. The price hike will add pressure to families already struggling to deal with the cost of living crisis.
The rise in CPI was attributed to a shortage of salad and vegetables coupled with a rise in the cost in restaurants and bars. Inflation figures took the market by surprise, with a quarter-percentage-point increase seen as a 95% certainty.
In Budget last week, Jeremy Hunt presented the Office for Budget Responsibility (OBR) forecast that inflation would fall to 2.9% by the end of this year. However, the chancellor stated that “lower inflation is not inevitable, so we need to stick to our plan to halve it this year.”
The British Pound rose more than a cent against the dollar, approaching $1.23 in the hours after the figures were released, on rising expectations of a rate hike. The Bank of England is scrambling to bring inflation back towards its 2% target, but some rate-setting committee members argue that signs of inflation easing over the coming months mean it should pause.
While Investec Economics expects the bank to choose a “wait-and-see approach” and keep interest rates at 4% as it assesses the situation, ING Economics suggests that the bank will want to see more evidence that inflationary pressures abate further. broadly before ending the cycle of interest rate hikes.
We will keep you updated on this evolving situation.