Inflation increase fuels interest in the interest rate

Last week, the Bank of England held UK interest rates at 0.5% for another month. Interest rates have been at this record low level since March 2009.

The economic stimulus programme, known as quantitative easing, was also kept unchanged by the Bank, remaining at £375bn.

The UK economy grew by 0.8% in the first three months of 2014, which means growth for five consecutive quarters. With most analysts having greater confidence in the strength of the economy, there would appear to be less reason to keep rates low to stimulate growth. Last month, Bank governor Mark Carney hinted that rates could increase later this year as the UK's economic recovery becomes more robust.

The number of people out of work is also falling, with the unemployment rate now down to 6.6% in the three months to May.

Against that, there seemed to be little pressure to raise rates to keep prices in check as the inflation rate fell to 1.5% in May, down from 1.8% in the previous month. The Bank's target inflation rate is 2%.

However, the surprise jump in inflation, shown in the official June figures out this week, took many by surprise. These figures showed that inflation unexpectedly jumped to 1.9% in June. It was the highest inflation rate since January and well above the 1.6% expected by most analysts.

For some, this has added to signs that there is enough strength in the economy to withstand a rate rise, according to some experts.  

Others analysts, however, such as Capital Economics, believe that despite the jump in June, inflation is likely to ease again by the end of the year, thereby removing any immediate pressure to raise interest rates.

Mr Carney stated last month that "we expect that eventual increases in Bank rate will be gradual and limited". He also referred to rates hitting a "new normal" of 2.5% by 2017.

As to when the first interest rate rise actually occurs, opinion is divided between late 2014 or early 2015. Even then it is likely to be edged up, so either way, not a lot for savers and income investors to get excited about just yet.

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