The UK inflation rate as measured by the Consumer Price Index (CPI), hit the upper limit of 3% today. The highest level in over a decade supports the Bank of England's surprise decision to raise interest rates last week to 5.25% from 5%. (Bank of England raises UK interest rates to 5.25%, catching the financial markets off guard )

UK inflation hits the Bank of Englands 3% CPI limit

The CPI figures virtually guarantee further rises in UK interest rates during 2007.

The Market Oracle warned of substantial interest rate hikes during 2007 to 5.75% by the 2nd half of 2007 in the articles of 26th December 2006, UK Interest Rate forecast for 2007 - Bank of England to do battle with inflation and 7th November 2006 UK Interest Rates could rise to 5.75% in 2007

Today's news not only supports the interest rate rise expectations but brings forward the possibilities that interest rates may even exceed the 5.75% target. However, the impact of the recent sharp falls in energy prices will likely reduce this possibility if that trend persists for the duration of the 2007.

Sterling is expected to be further supported by the news, as higher UK interest rates will further attract carry trade investments into UK sterling, i.e. the borrowing in low interest rate currencies such as the Japanese Yen, and the investment in higher interest rate currencies such as the British Pound.

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