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Interest rate hike on way as inflation soars

Northern Ireland economists have predicted a rise in interest rates after inflation soared to 4% in January, the highest level in over two years.

The Governor of the Bank of England, Mervyn King warned that there was a "great deal of uncertainty" over the outlook for inflation after the rate rose to a high not seen since November 2008 and up from 3.7% in December.

January's figure is twice the Government's target and will lend weight to the calls to raise the interest rate, which it was announced last week would remain static at 0.5%.

The Office of National Statistics said inflation was being driven up by soaring commodity prices, such as crude oil, as well as the impact of the VAT rise from 17.5% to 20% last month.

Alan Bridle, head of economics and research at Bank of Ireland, said that those on lower incomes would be badly affected by the hike.

"While the latest rise is again driven by indirect taxes and higher food and fuel costs, the patience, tolerance and credibility of the Monetary Policy Committee is being severely tested with 2% now looking more like the bottom of a range rather than the target," he said.

"In my view, there is the prospect of a couple of quarter point increases in the base rate during the second half of 2011 but with two MPC members already persuaded, the risks are that the first move could now come sooner," said Mr Bridle.

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Richard Ramsey, chief economist with Ulster Bank, said inflation has remained above target on 34 occasions in the 41 months since the credit crunch began.

"This latest rise in inflation includes for the first time the January increases in VAT and fuel duty," he said.

"As a result, there were robust monthly price rises for alcohol and tobacco, restaurants and hotels, transport and housing and household services - which includes energy bills."

But Hal J Catherwood, divisional director of investment management firm Brewin Dolphin, said consumers may be more concerned about inflation undershoot than overshoot in a year's time.

"With the headline rate now at 4% and still rising, the MPC will probably need to act by June, but only by 0.25%.

"We do not see inflation running away in the UK.

"However the effects of rising oil and food costs are very real for consumers at the minute," said Mr Catherwood.

Mike Irvine, head of financial advisers Davy Northern Ireland said that the MPC has a "tricky job" ahead.