Inflation rise may hit rate cut

Prospects for another cut in interest rates have eased after it emerged underlying inflation had reached its highest level in almost five years.

Economists believe the Bank of England's Monetary Policy Committee (MPC) will be deterred from acting on rates because of the sharper-than-expected rise.

Figures from the Office for National Statistics (ONS) showed inflation before mortgage interest payments rose 0.3% during February to 3%.

That means inflation has now been above the Government's 2.5% target for four months in a row. It was last higher in May 1998, when the figure reached 3.2%.

Headline inflation, which includes mortgage interest payments, rose 0.3% to 3.2% - the strongest rate since September 2000.

With rising oil and house prices, the Bank of England has been braced for short-term increases in the annual rate of inflation.

And while an easing is expected during 2004, MPC members will still be wary of stoking inflation with another cut in the cost of borrowing.

Those fears will be brought further into focus by the need to write a letter of explanation to Chancellor Gordon Brown if inflation goes above 3.5%.

HSBC economist John Butler said: "The appetite to cut interest rates further may be reduced if inflation is suddenly above 3.5%."

The Bank sprung a surprise rate cut in February but opted for no change this month and is likely to sit on its hands again in April.

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