Domestic heating costs and clothing are the most significant drivers behind the increase in annual inflation between January and February. The main downward pressure to inflation between January and February came from alcohol and tobacco.
John Mawdsley, chief executive officer of Omnii Solutions, said: “Sentiment in the City will quickly turn against the MPC if they don’t get inflation under control. RPI is at its highest level since 1991, and a rate rise is now moving quickly onto the horizon. I don’t expect lenders will be too perturbed. Yes, they do have to consolidate their balance sheets, but their margins are strong enough to be able to swallow a rate rise.”
Commenting, Chris Redfern, senior dealer, Moneycorp, said: “With UK inflation rising to new heights, the pound has strengthened by over 0.5% against the euro and the dollar today. The markets will now be scouring tomorrow’s BoE minutes for signs of an imminent rate hike, which could land on UK doorsteps as soon as April.
“Given that UK interest rates are currently so low and that a hike will always have a delayed impact, it is unlikely that any increase in rates would have a detrimental effect on growth before mid-2012. However, with economic growth firmly on Osborne’s mind, this data will certainly cause some pre-Budget jitters.”
Emma Wilson, director, forex specialists Currency Solutions, said: “There is a fine line between controlled higher inflation and high inflation controlling the economy. We are standing on that line right now.
“If this week’s minutes show further hawkishness on the Monetary Policy Committee then the odds of a rate rise will shorten dramatically.
“Markets are now likely to re-settle on early summer for a hike. Predictions for a rate rise had been pushed back as late as September following inconsistent growth data from the UK over the past month as well as events in Japan.
“Should it be revealed in Wednesday’s Bank of England minutes that another MPC member has joined the three interest rate hawks, Sterling could see some more lasting upwards momentum.”