United Kingdom interest rates set to rise as inflation hits 3 percent

Posted October 18, 2017

He said it is more likely than not that he will write open letter to Chancellor Philip Hammond, explaining why inflation exceeded the target by one percentage point.

Last month, Governor Mark Carney said that an interest rate hike is on its way "in the coming months". The increase, which took the rate to its highest since March 2012's 3.5 percent, was anticipated in financial markets and largely due to rising prices for food and transport.

The BOE's main remit is to target inflation and keep it around the 2% target rate.

Victoria Clarke, an economist with Investec, said she was surprised that Ramsden had come out strongly against the majority view in favour of a rate hike soon, but that that was countered by Tenreyro's positioning close to the majority view.

It's because of this above-target inflation that Carney and others on the bank's rate-setting panel are expected to raise the benchmark rate by a quarter point from the record low of 0.25 percent at the next policy meeting on November 2.

The expected rise in rates comes despite signs that the British economy is faltering - it is growing slower than any other Group of Seven industrial economy this year - and that inflation is expected to ease back down in coming months. She added that a premature rate hike could prove more costly to the economy than an early rate cut.

But much of the increase has been caused by the fall in the value of the pound since the Brexit vote, which is likely to be a temporary driver of price increases.

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The 15% or so drop in the pound against a range of currencies has ratcheted up the cost of imported goods such as food and energy.

However, the British pound remained lower against the dollar despite confirmation of Carney's view on inflation.

According to data released by the Office for National Statistics (ONS) on Tuesday (17 October), inflation as measured by the Consumer Price Index (CPI) rose 3% year-on-year last month, compared with the 2.9% growth recorded in September and in line with analysts' expectations.

The central bank's upcoming economic projections, released on November 2 alongside the rate decision, are set to show growth remaining weak and inflation edging lower. Carney has previously said he is part of that majority.

"The pressure from this depreciation will start to wane in coming months", Silvana Tenreyro, the newest member on the Bank of England's nine-member rate-setting panel, told lawmakers.

The latest report is in line with the forecast issued by the BoE in August, when it said it expected CPI inflation to peak at 3% in October this year.