• The MPC’s decision to leave interest rates unchanged at 5.25% this month represents only a short reprieve. Rates are still likely to rise again – perhaps as soon as next month. And there remains a chance that they will eventually have to rise above 5.5%.
• The case for higher interest rates remains strikingly clear, with significant upside risks to inflation stemming from a number of sources. To start with, the most recent CBI and CIPS/RBS business surveys have suggested that firms are feeling more confident about their ability to raise prices.
• Moreover, there is still a threat that pay growth accelerates during the current pay round. According to Incomes Data Services, the median pay settlement rose to 3.5% in January, up from the 3% level seen for most of last year. With RPI inflation still above 4%, a further pick-up is clearly possible. 
• On top of that, some members of the Committee are particularly concerned that the rapid rates of money supply growth and the high level of asset prices will eventually spill over into a sustained rise in general price pressures in the medium term.
• Finally, the MPC gave a very strong signal in its February Inflation Report that rates need to rise at least once more in order for the inflation target to be met in two years’ time. It would be strange for the Committee to give such a signal and not follow it up with another rate rise reasonably swiftly.
• Indeed, two members wanted to follow January’s hike with an immediate increase in February. Perhaps only a desire to wait until the recent market volatility has passed held the Committee back this month.
• Admittedly, some Committee members may have recently softened their view on rates in response to the weaker tone of some of the latest data. Indeed, the 1.8% drop in retail sales in January could be a sign that higher interest rates are starting to have an impact on the consumer sector.
• And CPI inflation fell sharply in January to 2.7%, from 3.0% in December. Taken together with the announcements by a number energy suppliers that they will soon cut their gas and electricity prices, this increased the chances that inflation will be below its 2% target as early as the summer.
• However, I think that the Committee will remain extremely concerned that, even as CPI inflation falls back sharply, more general price pressures remain pervasive. I still believe that interest rates will rise to 5.5%, most probably in April. And if the incoming news remains strong, one more rate rise thereafter is not completely out of the question.

Roger Bootle, Economic Adviser to Deloitte

Ends

Notes to editors
This press release has been prepared by Roger Bootle, Economic Adviser to Deloitte.  If you have any questions regarding the views in it, please contact Roger Bootle directly on 020 7823 5000 or via email on business@capitaleconomics.com.

This press release contains general information only and is not intended to be comprehensive nor to provide professional advice.  It is not a substitute for such professional advice and should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business.  Deloitte & Touche LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from acting as a result of any material in this publication.

About Deloitte
In this press release references to Deloitte are references to Deloitte & Touche LLP which is among the country’s leading professional services firms, providing audit, tax, consulting and corporate finance services. Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein whose member firms are separate and independent legal entities.  Neither DTT nor any of its member firms has any liability for each other’s omissions.  Services are provided by member firms or their subsidiaries and not by DTT.  Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.  The information contained in this press release is correct at the time of going to press.