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10.02.2011 11:18

EU focus: Inflation surge raises outside risk of BoE rate hike

Financial markets see a one-in-five chance that the Bank of England will raise interest rates from their record low 0.5% later on Thursday. The BoE must choose whether to hold fire to support growth at a time when Britain's recovery still looks patchy, or act now to reduce the risk that an imminent spike in inflation will turn into something more permanent.

Data earlier on Thursday showed British factory output fell unexpectedly in December, chiming with recent shock data showing the economy contracted in the fourth quarter of last year.
On the other hand, figures next week are likely to show inflation hit 4% in January, and economists believe it will go higher still.
"The MPC is coming under intensive pressure to raise rates," Bank of America/Merrill Lynch interest rate strategist John Wraith wrote.
Last month the BoE surprised markets when new MPC member Martin Weale joined long-standing hawk Andrew Sentance to call for a rise in rates to 0.75% from a record low 0.5%, and other MPC members said their decision was "finely balanced".
Inflation has exceeded the BoE's 2% target by at least a percentage point for over a year. On Jan. 25, BoE Governor Mervyn King predicted it could near 5% in the coming months.
But King said inflation remained on track to return to target early next year.
The tension between high current inflation and the BoE's official forecast that it will be well below target in barely a year's time lies at the heart of the split between money market and economists' views of likely BoE policy.
Money markets see almost a 20% chance of a rate rise at 1200 GMT on Thursday and a near certainty of a move by May.
By contrast, fewer than a third of economists polled by Reuters last week expect rates to rise before the final three months of this year.



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