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Early rate rise in prospect as inflation jumps

SCOTTISH Chambers of Commerce has cautioned against a swift rise in benchmark UK interest rates, after official figures revealed an unexpectedly sharp jump in annual inflation in June.

KEEPING COOL: Bank of England Governor Mark Carney appeared to take rise in inflation in his stride.
KEEPING COOL: Bank of England Governor Mark Carney appeared to take rise in inflation in his stride.

Data published yesterday by the Office for National Statistics showed that annual UK consumer prices index (CPI) inflation rose from 1.5 per cent in May to 1.9 per cent in June, the joint-highest rate this year. The City had predicted annual CPI inflation would come in at 1.6 per cent in June.

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A rise in clothing and footwear prices between May and June, in contrast to the usual fall between these two months, played a significant part in the jump in annual CPI inflation.

Increases in food and non-alcoholic beverage prices and rises in air fares also pushed annual inflation higher.

Sterling surged as financial markets took the view that the higher-than-expected inflation rate increased the chances of a rise in UK base rates from their record low of 0.5 per cent by the year-end.

The pound was trading at $1.7147 at 5pm yesterday, up 0.68 cents on its Monday evening level. Sterling also climbed sharply against the euro, which was down 0.61 pence at 79.14 pence.

However, Liz Cameron, chief executive of Scottish Chambers of Commerce, urged the Bank of England to steer clear of a swift rise in base rates.

She highlighted the fact that annual CPI inflation was still below the two per cent target set for the Old Lady of Threadneedle Street by the Treasury.

Bank of England Governor Mark Carney said in a speech at London's Mansion House last month that the first rate rise "could happen sooner than markets currently expect" and warned the housing market was showing potential to overheat.

However, Mr Carney appeared to take the jump in annual CPI inflation in his stride.

Appearing before the Treasury Select Committee, the Bank Governor said: "I am aware of [the] CPI number, but I would only draw attention [to the fact] that, in [our] May forecast, inflation … only gets back to two per cent three years out."

He added: "Inflation expectations are extremely well-anchored in the United Kingdom. They have definitely improved over the past year."

Touching on his comments last month about the possibility of an earlier-than-expected rise in rates, Mr Carney said: "We were concerned that markets were not reacting to data, a fairly long run of data, that was as good as expected, if not slightly better."

Ms Cameron, however, appealed for restraint on interest rates. And she urged the Bank not to use base rates to take the heat out of the London housing market.

She said: "Whilst a rise in inflation has been experienced, it is important to note that the rate remains below the Bank of England's target of two per cent. Therefore, there is no immediate pressure to increase interest rates as these figures indicate the seventh consecutive month in which inflation is [at or] below the target of two per cent."

Ms Cameron added: "Further statistics continue to show the cross-border asymmetry in housing prices, with house price annual inflation at 11 per cent in England compared to Scotland's much lower rate of 3.6 per cent.

"Therefore, it is imperative for the Scottish economy that the Bank of England address the rise in UK house prices by exploring the use of alternative measures, such as an increase in the number of houses being built as well as a rise in rental capacity, and do not only consider increasing interest rates. This will assist Scotland from suffering from the localised housing price bubble in London."

Howard Archer, chief UK economist at consultancy IHS Global Insight, said: "June's spike-up in inflation puts pressure on the Bank of England to raise interest rates sooner rather than later. Even so consumer price inflation actually still only averaged 1.7 per cent in the second quarter which is below the 1.8 per cent average forecast by the Bank of England in its May quarterly inflation report."

"With the majority of the evidence pointing to the economy still seeing healthy growth and the unemployment rate coming down markedly, we believe that the first interest rate hike from 0.5 per cent to 0.75 per cent is more likely to occur in late 2014 than early 2015, but it is a tight call."

Mr Archer meanwhile highlighted his belief that rates would rise only gradually.

He said: "Even if the Bank does start edging interest rates up before the end of 2014, we still expect them to only reach 1.25 per cent by the end of 2015, two per cent by the end of 2016 and three per cent by the end of 2017."

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