British inflation unexpectedly held close to its highest level in nearly six years in January, highlighting the challenge the Bank of England will face as it tries to return price growth to target over the next two years.
Consumer price inflation remained at an annual rate of 3% in January, unchanged from the month before, after reaching its highest since March 2012 in November at 3.1%, the Office for National Statistics said Tuesday, Reuters reported.
The figure was above economists’ average expectation in a Reuters poll for it to fall to 2.9%. The Bank of England surprised financial markets last week by indicating that it wanted to bring inflation back to target faster than before, aiming to return price growth to 2% within two years rather than three.
BoE Governor Mark Carney and his colleagues on the Monetary Policy Committee said interest rates would need to rise sooner and by somewhat more than the BoE had previously expected. This prompted markets to price in as much as a 70% chance of a quarter-point rise in interest rates by May, and a roughly 50% chance of a further increase in rates to 1% by the end of the year—a level last seen in 2009.
Inflation has surged in Britain since the decision by voters in June 2016 to leave the European Union hammered the value of the pound and pushed up the cost of imports. The combination of high inflation and limited wage growth—as well as uncertainty about the terms on which Britain will leave the European Union in 2019—is expected to mean Britain’s economy grows more weakly than other EU economies this year.
