March 22, 2011 / 12:11 AM / 9 years ago

Inflation revives talk of early interest rate rise

LONDON (Reuters) - Inflation surged to a 28-month high of 4.4 percent last month, reviving speculation that the Bank of England will not wait much longer to raise interest rates.

A man walks past a clothes store in central London February 15, 2011.REUTERS/Paul Hackett

Data on Tuesday also showed government borrowing recorded its worst February on record, providing a grim backdrop as Chancellor George Osborne puts the final touches to Wednesday’s 2011 budget.

Sterling strengthened on the inflation figures, which some analysts said brought a May rise in interest rates back into play as Bank policymakers try to wrestle price growth back to the bank’s 2 percent target, a goal they have missed for most of the last three years.

“They will have to push up their inflation forecasts in the next quarterly report (in May) and that will be ammunition for the hawks,” said BNP Paribas economist Alan Clarke. “We think that a rate rise will come in May.”

The Office for National Statistics said consumer price inflation rose to 4.4 percent in February from 4.0 in January, higher than the 4.2 percent forecast by economists. Housing costs, domestic heating bills and clothing prices were largely to blame.

Retail price inflation, a broader measures which is used as a starting point for many wage negotiations, rose to 5.5 percent from 5.1 percent, its highest since July 1991.

Six of the Bank’s nine-member Monetary Policy Committee voted to keep rates on hold in February, while three voted for a rise from a record-low 0.5 percent. A voting breakdown for the Bank’s March meeting is published on Wednesday.

Those MPC members in favour of keeping rates steady last month saw inflation falling sharply next year without big rate rises, and were concerned an unexpected sharp fall in fourth-quarter output may presage an extended period of below-par growth.

In some upbeat news for growth, the CBI business lobby reported on Tuesday that factory orders rose at their fastest pace since March 2008. However, prices rose at their fastest rate since July 2008.

Short sterling interest rate futures markedly extended losses after the inflation data and now price in roughly a 50 percent chance of a May rate rise.

The Bank’s long-standing rate rise advocate Andrew Sentance said after the data that inflation could easily exceed 5 percent later this year, and that the MPC had a duty to tighten policy now.

HEAVY BORROWING

Tuesday’s data also provided bad news for the Treasury. Public sector net borrowing totalled 10.280 billion pounds in February, up from 8.105 billion pounds for the same month in 2010 and well above economists’ median forecasts of 8.0 billion pounds.

“The deficit is much higher than expected, which goes against the trend up to date. Revenues are markedly softer whereas they have been overshooting the government’s forecast in earlier months,” said Citi economist Michael Saunders.

The government’s preferred measure, PSNB excluding financial sector interventions, rose to 11.771 billion pounds, taking its total for the fiscal year to date to 123.5 billion pounds compared to 136.6 billion at the same point in 2009/10.

Both measures were the highest for a month of February since records began in 1993.

The figures mark a sharp turnaround from January, which were boosted by unusually strong receipts for self-assessed income tax received that month, which are normally spread more evenly between January and February.

Only one month now remains of the 2010/11 fiscal year, in which the government has previously said it expects to borrow 148.5 billion pounds — equivalent to 10.0 percent of GDP — down from 156.4 billion pounds in the 2009/10 fiscal year.

“Barring a disaster in March, this still points to an undershoot of the full-year forecast ... but that undershoot may be closer to 5 billion than the 10-15 billion previously hoped,” said Jonathan Loynes, economist at Capital Economics.

The government plans to virtually eliminate the budget deficit over the next four years, a goal its opponents say risks driving Britain back into recession.

Editing by Stephen Nisbet

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