Strong growth and inflation data point to further rate rise

The last month has seen a string of strong economic data releases, suggesting that January’s surprise interest rate rise does not mark the peak of the cycle. CPI inflation in December rose to within a whisker of the 3.1% mark that would have required the Governor of the Bank of England to write an explanatory letter to the Chancellor. And GDP growth accelerated to a two year high of 3% in Q4. With the money supply still growing rapidly and the current inflationary threat from the pay round, we think that interest rates will be raised to a peak of 5.5%.