Homeowners are facing more pain today with the Bank of England poised to push up interest rates again.
The base rate is expected to rise from 4 per cent when the decision is announced at noon, with 0.25 points considered most likely by analysts.
Markets had been split over whether Threadneedle Street would continue with the run of 10 consecutive increases, with market anxiety in the wake of the Silicon Vallley Bank and Credit Suisse meltdowns weighing heavily.
The US Federal Reserve also went ahead with a 0.25 point rise overnight, meaning that traders will be taken by surprise if UK rates do not follow suit.
A rise would take the base rate close to pre-Credit Crunch levels, and tighten the squeeze on families already struggling to deal with the cost of living crisis.
Inflation had been expected to continue its downward trajectory in February, but the pace of prices actually picked up again.
Higher CPI was driven by salad and vegetable shortages coupled with a spike in cost at restaurants and pubs.
The Bank of England raised interest rates from 3.5 per cent to 4 per cent last month
Homeowners are facing more pain today with the Bank of England poised to push up interest rates again (pictured, governor Andrew Bailey)
Earlier this week markets were betting that there was a 50/50 chance that Bank rate would remain at 4 per cent but after the inflation figures an increase of a quarter percentage point was seen as 95 per cent certain.
At the Budget last week, Jeremy Hunt paraded forecasts by the Office for Budget Responsibility (OBR) that inflation will fall to 2.9 per cent by the end of this year.
But the Chancellor said yesterday: ‘Falling inflation isn’t inevitable, so we need to stick to our plan to halve it this year.’
The pound rose by more than a cent against the dollar to just shy of $1.23 – its highest level since the start of February – in the hours after the figures were published on elevated expectations of a rate hike.
Paul Dales, chief UK economist at Capital Economics, said: ‘The reacceleration in CPI inflation in February may be enough to tilt the Bank of England towards raising interest rates from 4 per cent to 4.25 per cent tomorrow despite the recent turmoil in the global banking system.’
Inflation surged to a four decade high of 11.1 per cent last year after a price spiral that was already taking hold accelerated as a result of Russia’s invasion of Ukraine, which pushed up energy costs.
Interest rates have been rising sharply as the Bank of England strives to bring inflation back down towards its 2 per cent target – though some members of its rate-setting committee have lately been arguing that signs inflation will ease over coming months mean that it should pause.
Craig Erlam, a senior market analyst for OANDA, said the inflation figures came as a ‘crushing blow’ for the Bank.
He said: ‘Whatever flexibility the Bank of England may have thought it would have on Thursday was wiped out by Wednesday morning’s inflation data and once more, the topic of conversation has shifted to whether 0.25 percentage points will be enough.’
He added there is ‘nothing that would justify a pause’ in raising interest rates, ‘even against the backdrop of financial stability concerns and the knock-on effects of aggressive rate hikes’.
ING Economics suggests that the Bank of England will want to see more evidence that inflationary pressures are easing up more broadly before ending its cycle of rate hikes.
Jeremy Hunt (pictured yesterday) has paraded forecasts by the Office for Budget Responsibility (OBR) that inflation will fall to 2.9 per cent by the end of this year
ING’s experts are also predicting a 0.25 percentage point increase, but said it could be the final rise before rates fall back down.
Meanwhile, Investec Economics agreed that the worse-than-expected inflation reading will make the MPC’s decision more difficult, but predicted the Bank will opt for a ‘wait-and-see approach’ and keep rates at 4 per cent while it assesses the situation.
Ellie Henderson, an economist for Investec, said: ‘When deciding the appropriate level of the bank rate, the MPC will have to assess which is the lesser of two evils: the risk of inflation being higher for longer or the current threat to financial stability stemming from the rapidly evolving fears of a banking crisis.’