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Inflation sparks threat of more rate rises

The threat of a further rise in interest rates looms following news that the rate of inflation reached a 15-year high last month.

The Retail Price Index measure of inflation, which includes mortgage interest payments, jumped to 4.4% in December from 3.9% the previous month, reaching its highest level since 1991.

Meanwhile, the Consumer Price Index rose to 3% from 2.7% during the same period, the highest rate since December 1995.

This means that Bank of England governor Mervyn King did not suffer the humiliation of having to write to chancellor Gordon Brown explaining why the 3% figure had been transgressed – he will suffer that ignominy if the CPI hits 3.1%.

But this rise raises the prospect that the BoE could further raise the base rate to combat inflation. That would put added pressure on borrowers, particularly those on tracker products whose finances are already suffering after the January 11 base rate rise.

Andrew Sentance, a member of the BoE’s Monetary Policy Committee, says: “Our actions and statements should reinforce expectations of low inflation consistent with the target set by the government.

“Inflation expectations can be powerful in maintaining monetary stability if they are well anchored, as they have been in recent years. They are dangerous if they become unhinged.”

Economists and experts are divided over whether a further rise is required. Ray Boulger, senior technical manager at John Charcol, says it would be “very surprising” if there was not a further quarter point rise in the base rate. But he acknowledges that other factors such as a fall in energy prices will help rein in inflation.

Oliver Gilmartin, economist at the Royal Institution of Chartered Surveyors, says the concern now is that inflationary pressure may be prolonged.

He says: “Higher rates will dampen house price growth although a supportive global economy and firm housing demand will maintain house price inflation at 7%.

“January’s surprise rate rise is likely to soften new buyer enquiries in the coming months.”

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