Inflation stats cast doubt on rate cuts

After the Office of National Statistics revealed on Tuesday that the Consumer Price Index had increased by 0.1 per cent to 2.2 per cent in January, the Bank of England issued a clear signal that it had a lot more of a balancing act on its hands.

Forecasting a sharp slowdown in UK growth to less than 2 per cent by the time the year is out, the Bank predicted that inflation will continue to climb, possibly as high as the 3 per cent dangerzone.

Mervyn King, Bank of England Governor, said that the Monetary Policy Committee (MPC) would remain focused on inflation in the medium term, suggesting that unless the economy takes a dramatic turn for the worse, interest rates would hold at 5.25 until inflation pressures eased.

More worryingly, King said that he thought it was likely he would have to write a second letter to the Treasury explaining that inflation had breached the 3 per cent barrier once more.

Fuel and food price hikes have had a marked effect on the current rate of inflation, although King believes the added pressure is just temporary.