FOCUS UK rates set to rise to highest since Sept 11 2001 on inflation spike

Borrowing costs in the UK are set to rise to their highest level since the Sept 11 2001 terrorist attacks, analysts said following the news that inflation moved further away from target during August, contrary to most expectations.
The office for National Statistics said the consumer price index rose by 2.5 pct in the year to August, up from the 2.4 pct rise in July. Analysts polled by AFX News had not expected any change in the annual rate.
The August rate is the equal highest since official records began in Jan 1997. The Bank of England raised borrowing costs in August, to 4.75 pct, following the energy-related spike up in the June CPI rate to 2.5 pct.
Analysts said today's news will have surprised the market as they anticipated that the impact of high oil prices last year to have dropped out of the equation and push down the consumer price index.
"However, with consumer prices rising further above the 2.0 pct target, there are growing pressures for the Bank to raise interest rates in November, despite yesterday's news of easing producer prices," said Thushani Gajasinghe, economist at the Centre of Economic and Business Research.
The BoE is charged with setting a policy to achieve a 2.0 pct CPI inflation rate and justified its recent quarter point rate hike to 4.75 pct -- its first in two years -- by the fact that CPI inflation has been rising by more than anticipated.
In its most recent Inflation Report in August, the BoE said it expects further upward pressure on CPI over the coming months from higher university tuition fees and utility charges, from the likes of Centrica PLC's British Gas unit and RWE AG's PowerGen.
And Howard Archer, chief UK economist at Global Insight, noted that consumer price inflation averaged 2.45 pct in July and August, above the 2.32 pct average for the third quarter projected in the Inflation Report.
In addition, he said the rise in RPI inflation to a 20-month high of 3.4 pct increases the risk of higher wage settlements, as many pay deals are based on this.
"We expect a 25 basis point interest rate hike in November but believe that moderating growth will alleviate the need for further interest rises after that," he said.
Not everyone is convinced that the BoE will tighten again and take its key repo rate up to 5.00 pct, which would take it up to its highest level since the attacks in the US five years ago. In the wake of the attacks, central banks across the world reduced borrowing costs in a concerted effort to offset the impact with cheaper money.
Daragh Maher, analyst at Calyon, said the key for interest rates will be what is happening with inflation expectations and underlying inflation.
"The fact that core inflation remains a paltry 1.1 pct year-on-year, even after its acceleration in August, means the BoE retains the luxury of being able to wait and see, most probably beyond November," he said.