UK inflation at 10-year high sets the stage for an interest rate hike in a few weeks

Driven by higher energy and transport costs, the UK consumer price index rose 4.2% in the year to October, according to official data released on Wednesday. That’s the biggest jump in the index since November 2011.

A rapid recovery in demand following the easing of Covid-19 restrictions, shortages of goods and workers, and rising energy costs are driving prices up around the world. The UK is also feeling the consequences of Brexit, which is adding to the cost of doing business with the European Union, its biggest trading partner.

But inflation data for October was even higher than analysts expected. The pound rose against the US dollar and reached its highest level against the euro since February 2020, as investors bet on a rise in UK interest rates.

“The upward surprise in inflation data for October supports our expectation that the Bank of England will raise the bank rate by 15 basis points to 0.25% at its next monetary policy committee meeting on December 16.” wrote Kallum Pickering, Berenberg’s senior economist. in a research note.

Higher official interest rates can increase the cost of borrowing for businesses and households, as well as encouraging people to save more, taking some of the heat out of inflation.

The bank of england slashed interest rates to an all-time low of 0.1% in March 2020 as part of a package of emergency measures to prop up the economy after activity collapsed due to the pandemic.
Boris Johnson is not worried about the UK economy.  He should be

Investors expected the central bank to start raising rates when it met earlier this month. Instead, he chose to stay the course while waiting for more data on the labor market, concerned that unemployment could rise as the UK government’s support for employers lapsed.

Some of those employment concerns were likely to have been mitigated by Tuesday’s news that UK unemployment fell to 4.3% in September, even as the country’s licensing program ended.

“When combined with yesterday’s decent labor market release, the larger-than-expected jump in CPI inflation in October makes an interest rate hike in December even more likely,” said Paul Dales, chief economist. of Capital Economics for the United Kingdom.

Inflation is now at twice the Bank of England’s 2% target level, while economic growth is slowing, raising the specter of a period of “stagflation”. The central bank’s chief economist himself has already warned that inflation could increase above 5% in early 2022.
Transportation costs played an important role in the latest spike in inflation. The UK Office for National Statistics said on Wednesday that average gasoline prices: which hit a record late last month – jumped 22% in the year through October to 138.6 pence per liter (about $ 8.50 per gallon).

Reference-www.cnn.com

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