Bank risks higher inflation by raising rates too early

Currencies Direct April 18th 2011 - 2 minute read

A report this morning suggests the Bank of England risks pushing inflation higher if it looks towards a rate rise over coming months. The Ernst & Young Item Club suggest higher rates would push up mortgage costs and increase the RPI measure of inflation which is commonly used in wage settlements. E&Y think the Bank risks starting a wage-price spiral if they raise rates, as employers are put under increasing pressure to increase wages as inflation rises. The Bank also releases minutes from the last meeting on Wednesday. The markets are looking for another MPC member to join Dale, Weale and Sentance in voting for a rate increase. Although unlikely, if the vote shows 5-4 Sterling will rise as traders build in the prospect of a rate increase as early as next month. Finland may have thrown a very large spanner into the works of the proposed bail-out of Portugal. True Finns, a Euro-Sceptic party are on course to secure enough of the vote to be part of the new coalition government. Finland requires majority parliamentary vote in approving major EU decisions. The EU bail-out funds requires unanimous approval from its 17 member states to proceed and the worry is that required majority will not be achieved, potentially delaying any deal. With a lack of Eurozone data this week, the focus will fall on Eurozone banks and financial institutions if the Finns fail to reach agreement over the next few days. The lack of US data this week point towards the Dollar remaining under the radar – especially if a Eurozone stalemate drags on. The only data of note is housing starts and existing home sales due Tuesday and Wednesday respectively. The Fed keep identifying housing and labour markets as two of its key concerns so the market is watching these figures quite closely to try and second guess the Fed’s next move.

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