The Bank of England governor, Mark Carney in a speech last week cautioned that inflation in the UK would rise above 3% in the few months. The comments came after earlier in the week, official data showed that consumer prices in the UK rose 3% in the month of September on an annual basis.
This put the UK’s inflation a full percentage point above the BoE’s inflation target of 2%. The price increases were attributed to the “Brexit related price increases.” Carney’s comments reinforced expectations that interest rates in the UK will probably rise in the near month.
The Bank of England has been lowering rates, and a rate hike will mark the first increase in nearly a decade. Carney told lawmakers that he was “more likely than not” to pen a letter to the Treasury head, Philip Hammond.
This comes as the Bank of England is expected to provide an explanation when inflation rises a full percentage point above the set target.
Market participants are favoring a rate hike in November. The BoE is expected to hike rates by 25 basis points which bring the UK’s interest rates to 0.50%. This was the same level at which interest rates stood before the June 2016 Brexit referendum.
Rate hike expected to tighten consumer spending
The rate hike, although expected to be a one-time event is expected to put a squeeze on consumer spending. This comes amid mounting evidence that the UK’s economy was faltering.
In the most recent IMF report, the UK was singled out as the G7 member nation that could see growth rising at the slowest paced.
Data last week included the UK’s unemployment report. The unemployment rate was steady at 4.3%, unchanged for the past two months. The current unemployment rate in the UK was the lowest since 1970’s.
The average earnings, however, continued to lag. Data showed that average earnings increased 2.2% in the period of three months to August. This was the same pace of increase witnessed in the previous three months to July.
With wages still lagging behind inflation and the UK economy expected to continue to expand at a sluggish pace, the BoE’s rate hikes are likely to put further pressure on household income.
According to some estimates, the UK labor market was seen at being capable of creating jobs, but wage growth was seen staying flat.
— James Melville (@JamesMelville) October 25, 2017
On Thursday, the retail sales data which gives a glimpse on spending showed a 0.8% decline. This was more than the 0.1% decline that was forecasted by economists. The data further dampened, rather clouded the outlook for the BoE’s rate hike plans. On an annual basis, retail sales slowed to 1.5% marking the slowest pace of increase in more than four years.
Amid the slowdown, the Brexit theme continues to play out. Some members of the UK’s Conservative party were reportedly putting pressure on PM May to prepare for a no-deal. This is expected to put further pressure on the already weaker economy. Meanwhile, EU leaders were seen imposing a fresh bill on the UK to pay for the EU leaders pensions which is expected to be an additional burden on the UK government.
UK Advance GDP Report
The preliminary GDP report for the third quarter was a surprise as data from ONS showed that the UK economy advanced 0.4% during the three months ending September. This was a slight improvement from the 0.3% increase noticed in the second quarter.
The ONS said that with the Q3 2017 data, the UK’s economy was seen expanding for nearly nineteen consecutive quarters. On a year over year basis, GDP growth in the UK was registered at 1.5%. Most of the gains in the GDP came from the services sector which expanded 0.6% while manufacturing rebounded with a 1% expansion following a weak second quarter.
Although some economists were doubtful on the GDP data, for the moment, the central bank officials are likely to see this as a welcome sign which could mean that the BoE will proceed with a rate hike come next week.