Rate rises ruled out as inflation hits new high

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There was some good news for millions of borrowers in the UK this week with the Governor of the Bank of England ruling out imminent interest rate rises.  Despite inflation in the UK rising to 4.5 per cent – more than twice the Government’s target – Mervyn King indicated that rises in the costs of living were temporary and that interest rates would remain low.

Inflation rise is ‘temporary’

Mr King is obliged to write to the Chancellor every three months if inflation is more than one per cent above or below the government’s target.  In his letter, the Governor of the Bank of England said that he expected inflation to fall back towards the target by 2012 or 2013.

He said: “Inflation is likely to rise further over the next few months, as increases in the price of energy are likely to raise petrol prices and make it more likely that there will be substantial increases in utility bills later in the year.”

The rise in the rate of inflation was blamed on higher Easter air fares, rises in petrol and energy prices and the increases cost of cigarettes and alcohol following duty increases in the recent Budget.

Interest rates to stay low

Whilst the news may be a blow to savers who rely on interest to supplement their income, millions of borrowers will continue to enjoy low mortgage rates.  The Guardian reports that ‘King expressed concern about the ability of the UK to cope with higher borrowing costs’ and that he is keen to keep rates low.

Andrew Smith, chief economist at accountants KPMG, said: “The increase is again due to ‘temporary’ factors, but with inflation heading to 5% the doves on the MPC will need strong nerves. The picture is still of a fragile underlying economy and with austerity measures now starting to bite, a rise in interest rates could be the undoing of the recovery.”

Author: Sam Allcock
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