King attributed the increase from 2.8 per cent in February to rapidly rising fuel and food prices along with a growth in the price of furniture of up to 10 per cent in the run up to Easter. However, King stated he expected inflation ‘to fall back within a matter of months’.
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The MPC has a set target, measured through the Consumer Price Index, of maintaining 2 per cent inflation. By passing 3 per cent, an imminent increase in the Base Rate has now become almost a certainty.
In the letter to Gordon Brown, King said: “Because of the long lags between changes in interest rates and their impact on inflation, the MPC will look through the short-term volatility in inflation over the next year resulting from fluctuations in domestic energy prices and set Bank Rate to keep inflation on track to meet the 2 per cent target in the medium term.”
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Ray Boulger, senior technical manager for John Charcol, said: “Clearly, the chances of a Base Rate increase are very high now. Swap rates have also gone up sharply and, on that basis, lenders are likely to put fixed rates up. In the short-term, this is bad news for the housing market and will make affordability more of an issue.
“Yet in many ways, a rise increases the chance that rates will fall sooner. It’s difficult to see rates going past 5.50 per cent, but if it does lenders will factor that into their pricing.”
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