UK inflation rising

Strong demand will probably push British inflation up above its two per cent target, Bank of England Monetary Policy Committee member Paul Tucker said yesterday.

Explaining why he voted to lift interest rates last month against the majority decision to leave them unchanged, Mr Tucker said in a speech that his own view was that the risks were slightly less to the downside than the MPC's central view.

For example, Mr Tucker cited the recent rise in the consumer price index as evidence that inflation was not materially stuck below target.

"The puzzle about the apparent weak feed-through from demand to inflation is reduced somewhat by the Committee's judgement that the performance of the labour market improved over recent years," he said.

"That leaves continuing demand pressures likely to feed through to inflation, looking ahead," he said, according to the text of his speech in Guildford, southern England.

Gilts and short sterling interest rate futures extended losses after Mr Tucker's comments even though markets had anticipated a hawkish speech given he was the one MPC member to vote for a rate hike in February.

"The fact that he believes recent rises in CPI to indicate we are not stuck materially below the two per cent CPI target will serve to further provoke concern that the MPC is poised for a further rate hike over the near term," said Richard McGuire, fixed income strategist at RBC Capital Markets.

The MPC has now left interest rates at 4.75 per cent for six months in a row but Mr Tucker's call for a hike last month and a run of hawkish comments from other MPC members has raised the betting that borrowing costs could hit five per cent by May.

"With monetary policy needing to be set on a medium-term view, overall I concluded at the MPC's latest meeting that our interest rate should be increased by 25 basis points - a small tweak to reflect the outlook," Mr Tucker said.