The Bank of England surprised financial markets on August 3rd when it raised the base rate from 4.5% to 4.75%. Its next step should prove less unsettling to the City. This week the bank indicated that a further increase is in the offing. The bank signalled the rise in its quarterly Inflation Report, published on August 9th. This set out, as usual, both a central projection for inflation and the risks around it (see chart on next page). The bank's main view is that if the base rate were to stay at 4.75%, the annual rate of consumer-price inflation would exceed 2.0%-the government's target-over the next two years. Since it takes that time for changes in monetary policy to have their maximum effect on inflation, the projection suggests the need for another rate rise.
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