United Kingdom interest rates set to rise as inflation hits 3 per cent

Javier Stokes
October 18, 2017

The rise in September signifies that inflation in the quarter has exceeded the Bank of England's forecast of 2.7 percent in the third quarter, made at the time of the August Inflation Report. We expect inflation to approach summit in October.

The ONS reported this morning the annual rate of United Kingdom inflation as measured by the Consumer Price Index had reached its highest level since April 2012 on the back of rising prices for food and recreational goods, along with transport costs, which fell by less than they did a year ago.

It means Bank of England Governor Mark Carney will be forced to write a letter to the Chancellor explaining why inflation has jumped above the target of two per cent.

Ramsden told the questioning Parliamentary committee that he didn't anticipate inflationary pressures would build strongly enough in the coming months, to warrant an immediate rate hike.

Sterling dropped 0.41 percent to $ 1.3167. To add insult to injury, an impending interest rate hike will increase mortgage repayments, directly affecting May's base: middle-class voters.

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"Given market sentiment, it appears that Carney will have to follow through and raise rates in November to maintain credibility".

"Mark Carney must recognise the wolves are now at the door and take action to strengthen the pound even though this may increase mortgage costs". But there was some uncertainty as to how much more prices would rise in September. Employment remains high and borrowing costs are low, for the time being at least.

He said the cut in interest rates implemented immediately after the European Union referendum result was the right thing to do to secure economic growth, but that the "trade off" between protecting against higher inflation and securing economic growth has changed, to the point where a rate rise would be unlikely to hamper growth, but could ease inflationary pressure. In the face of high inflation we are still seeing little wage growth so the pressure is continuing to grow on United Kingdom households.

Though the central bank's upcoming economic projections, released on the day of the next rate-setting meeting, are set to show growth remaining weak and inflation edging lower, many economists think the bank will raise interest rates to give itself room to cut them in the future should the Brexit discussions fail to make headway and the economic outlook darkens further.

"Over the coming months, our expectation is that it will start to fall back to 2%, the level at which the Bank of England is mandated to maintain it". That suggests investors are now less certain of a November rate hike.

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