Rate freeze on cards despite one-year high for inflation

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Interest rates are set to remain on hold despite the cost of living creeping up to its highest level for a year.

Analysts said yesterday that the Bank of England was unlikely to begin raising borrowing costs until next year, at the earliest, as the economic recovery and global backdrop remain fragile.

The ONS said motor fuel prices were the main driver behind the uptick in CPI

The ONS said motor fuel prices were the main driver behind the uptick in CPI

Official figures showed that consumer price inflation rose to 0.3 per cent last month from 0.2 per cent in December, touching its highest level since January 2015 and stoked by rises in the price of alcohol and clothing.

The Office for National Statistics said inflation also nudged higher as fuel and food prices dropped less than they did a year ago.

But despite the rise, inflation remains historically low, with the central bank predicting that it will remain well below its 2 per cent target for some time yet.

Sharply lower oil prices are set to keep a lid on inflation, leaving policymakers in no rush to raise interest rates above 0.5 per cent, where they have been for nearly seven years.

Ben Brettell, senior economist at Hargreaves Lansdown, said there was a “complete absence of pressure” on the Bank’s monetary policy committee (MPC) to lift rates.

“Even Ian McCafferty, the most hawkish member of the MPC said [on Monday] that he withdrew his vote for higher interest rates because he feels inflationary forces have receded in recent months.” noted Brettell. “There looks no reason to suggest the era of ultra-low interest rates will come to an end any time soon.”

READ MORE: BoE cuts growth outlook as rates kept on hold

Howard Archer, chief UK and European economist at IHS Global Insight, said he believed the Bank was “most likely” to begin edging rates up in the “early months of 2017”, supported by firmer GDP expansion, an inflation rate above 1 per cent and stronger earnings growth.

He added: “It currently looks unlikely that the Bank of England will raise interest rates during 2016. However – despite recently increased market speculation – we doubt that the Bank will cut rates, barring a major downturn in the economy which we do not expect to occur.”

The increase in inflation to 0.3 per cent marks the third month in a row that it has risen. Officials said alcohol prices rose 5.2 per cent between December and January, with spirits increasing by 7.5 per cent, beer climbing by 3.6 per cent and wine up 4.8 per cent.

Food prices continued to fall last month, but less than a year ago.