BoE forced to explain as inflation exceeds three per cent

British inflation rose above three per cent in March for the first time since the Bank of England took charge of interest rate policy, forcing the bank to write the government an unprecedented letter of explanation.

The data pushed the pound above the psychological $2 level it had last seen in September 1992 as it strengthened convictions that at least one more interest rate will be needed to tame price rises.

Official data yesterday showed consumer price inflation leapt to 3.1 per cent last month, the highest since the series began in January 1997, just months before an incoming Labour government handed the bank control of monetary policy.

Analysts had forecast an unchanged rate of 2.8 per cent. Britain's central bank said the rise reflected an unexpectedly sharp rise in petrol and food costs and it remained confident inflation would fall sharply in the coming months.

"Because there are long-term lags between changes in interest rates and their impact on inflation, the committee will continue to look through the short-term volatility in inflation over the next year or so," Bank of England Governor Mervyn King said in the letter. In response, Finance Minister Gordon Brown said the government agreed with the bank's approach and would continue to support its policy committee in its forward-looking decisions.

Britain's central bank has raised interest rates three times since August in a bid to curb inflation which has been above target since last May.

Analysts were already expecting another rise to 5.5 per cent next month, but yesterday's inflation data stoked speculation that there could be further increases.

"It's obviously very bad news and will prompt questions about how high interest rates will rise over the cycle. A May move is a certainty," said Philip Shaw, economist at Investec.

"It opens up a strong possibility of interest rates rising beyond 5.5 per cent."

The inflation data came a day after figures showed factory gate prices rose unexpectedly in March. A flurry of surveys have also pointed to renewed strength in Britain's housing market.

The unexpected rise comes at a bad time for Brown, already under fire in a row over pensions reform dating back to his first budget in 1997. Brown is hoping to take over as Prime Minister from Tony Blair soon and his reputation as a guardian of economic growth and stability has been one of his strongest selling points.