Another rise for interest rates?

Updated 12.31 Wed Feb 14 2007

Keywords: inflation, bank, Interest rates

Interest rates must rise one more time for inflation to return to its 2 per cent target by the end of 2008, the Bank of England has indicated.

The Bank said there will be a sharp decline over this year before picking up to the target at the end of next year - based on City expectations that rates rise a quarter of a percentage point to 5.5 per cent in the second quarter of 2007.

The possibility of a further rate rise is bad news for borrowers who have already seen three interest rate rises since last August

The possibility of a further rate rise is bad news for borrowers who have already seen three interest rate rises since last August.

Yesterday, official figures from the Office for National Statistics (ONS) revealed that the CPI had fallen faster than expected in January to hit 2.7 per cent from 3 per cent in December - the single largest monthly decrease since January 2003.

The decline is due to energy costs and lower import price inflation beginning to feed through to consumer prices and business costs.

BoE Governor Mervyn King said gas and electricity prices are likely to fall by 20 per cent over the year, but said there are upside risks to inflation.

"The current squeeze on real take-home pay may lead to greater upward pressure on earnings than in the central projections," he said.