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UK interest rates still expected to rise on Thursday despite inflation surprise

Nature

The Bank of England is expected to raise interest rates again, but weaker-than-expected inflation figures this week give policymakers a little more leeway than they otherwise would have had, economists say.

The Monetary Policy Committee was widely expected to raise rates again, from 5.25% to 5.5% when it announces its decision on Thursday. This would be the highest base rate since February 2008.

Inflation figures released Wednesday did not change that outlook, economists say, but made it less likely than before.

Inflation reached 6.7% in August, compared to 6.8% in July, and significantly lower than the 7.1% expected.

These figures came as a shock to many and probably surprised the Bank’s decision-makers as well. Earlier this month, Governor Andrew Bailey said recent increases in fuel prices likely meant inflation would “accelerate” in August.

The Bank forecast that inflation would reach 7.1% during the month.

The Bank is raising interest rates to curb inflation, so the fact that inflation is lower than expected will have given policymakers at the Monetary Policy Committee (MPC) more room to maneuver.

But experts at Investec Economics said that while headline and services inflation had both fallen below August forecasts, private sector wage growth had far exceeded the Bank’s forecasts.

The bank had forecast that wages would rise 6.9% over three months compared to the previous year. In fact, it appears to have increased by 8.1%.

“We believe it is this variable that will convince the Bank of England to raise its key rate again tomorrow to prevent upside risks to inflation from crystallizing,” Investec said.

They added: “Overall, we don’t think today’s weaker numbers will change tomorrow’s decision – we continue to expect a 25 basis point rise to 5.5% as baseline scenario – but the risks around this have changed and this more clearly calls into question the November Rate Decision.

So this could mean that if the Bank decides to raise rates this week, it may be the last time it does so, at least for a while.

Any increase would mark the 15th consecutive increase in the Bank’s base rate. It started raising rates by 0.1% in December 2021 and has not missed an opportunity to do so since then.

The increases were an attempt to stem inflation, and the bank’s Sarah Breeden, who is expected to join the MPC before the November meeting, said this week she believed inflation could have been double the rate achieved without Bank intervention.

But an increase on Thursday is far from certain. James Smith, developed markets economist at Dutch bank ING, called the decision “tight.”

“We are still tempted to say that the Bank of England will raise rates tomorrow, and that part of the surprise fall in services inflation is due to volatility in travel categories,” he said .

“But it’s a close decision, and the wage and inflation data suggest that the end of the current tightening cycle is very close to its conclusion.”

Debapratim De, senior economist at Deloitte, said: “Although many expect the Bank of England to raise interest rates by 25 basis points this week, today’s figures will give it a additional room for maneuver, if it instead chooses to suspend its tightening. »

Nature

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