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October 11, 2010    

UK inflation expected to remain above 3%

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by Kay Murchie

The Office for National Statistics (ONS) is scheduled to announce the UK inflation rate tomorrow morning, with analysts expecting the annual rate to remain above the 3% mark.

Last month, the ONS reported Consumer Price Inflation (CPI) remained unchanged at 3.1% in August - representing the ninth consecutive month that it has been above the Bank of England’s target of 2%.

Inflation has remained stubbornly high over recent months and at the last four interest rate meetings, policymaker Andrew Sentance voted for rates to be lifted from their current historic low of 0.5% – where they have been since March 2009.

The CPI inflation rate is a benchmark for the Bank of England’s Monetary Policy Committee (MPC) but the Bank has already noted that inflation has remained more persistent than it had expected but a hike in interest rates are not required at this time.

The recent decision to hike VAT to 20% next year by the coalition Government will also undoubtedly keep inflation higher, noted the Bank.

As investors await tomorrow’s data, sterling dipped today by 0.3% to $1.5908, as speculation mounts as to whether the Bank may inject more cash into the economy, via its quantitative easing (QE) scheme.

QE, also known as printing money, is a process whereby the Treasury injects funds into the financial system to ease pressure on banks by giving them extra capital.

The Bank embarked on its £200 billion QE programme in March 2009, when the economy was in the midst of its worst recession in more than five decades.

Today, accountancy and business advice firm BDO said the Bank should inject more money into the economy and this followed requests from MPC members, Adam Posen and Martin Weale, as well as the Institute of Directors (IoD), who have all have recently suggested that the Bank should inject more cash into the economy to boost growth.

Meanwhile, CMC Markets analyst Michael Hewson, said: “UK inflation is sticky. If there is any spare capacity in the economy it is not bringing inflation down.”

The ONS will publish inflation figures at 9:30 a.m. tomorrow.

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