The prospect of UK interest rates rising again is moving back onto the agenda after the US Federal Reserve increased rates for the first time in three years.
The Fed last yesterday raised its target range by 0.25 percentage points to 3.75% to 4.00% range on Wednesday as policymakers responded to continued inflationary pressures.
Attention now turns to the Bank of England, which announces its latest interest rate decision at 12 noon today with Bank Rate currently standing at 3.75%.
An immediate increase is not expected, but the combination of higher UK inflation, rising energy costs and resilient economic growth is strengthening the case that the next move in Bank Rate could ultimately be upwards.
INFLATION PRESSURE
UK CPI inflation increased from 2.9% to 3.1% in August, moving further above the Bank’s 2% target.
Energy prices have become an increasingly important part of the outlook. Oil prices have risen sharply amid geopolitical tensions, while the Ofgem energy price cap is due to increase by a further 4% in October.
The National Institute of Economic and Social Research (NIESR) yesterday highlighted oil had climbed above $107 a barrel, compared with the $77 average assumed by the Bank in its forecast for CPI inflation to peak at 3.2%.
Charlotte O’Leary (main picture), associate economist at NIESR, said: “Energy, meanwhile, dominates both the news headlines and headline inflation: motor fuel prices have risen, the Ofgem energy price cap is set to increase by a further 4 per cent in October and is expected to rise again in the winter months, while food price inflation ends its disinflationary course.
“Together, these pressures are tightening the purse strings of UK households and reviving concerns over the cost of living.”
RATE HIKE RISK
NIESR still expects the Monetary Policy Committee to leave Bank Rate unchanged today, with limited evidence so far that higher energy prices are generating broader second-round inflationary effects.
But it believes the conditions for a future increase could develop if inflationary pressures persist alongside stronger economic activity.
O’Leary said: “With limited evidence of second-round effects so far, we expect the MPC to hold rates.
“However, mounting inflationary pressures, alongside resilient growth data, may eventually grant scope to raise rates without materially damaging the economy.”
The Fed’s decision does not mean the Bank of England will follow. The two central banks set policy independently and are responding to different domestic economic conditions.
However, the US move adds to evidence of how quickly the global interest rate environment has changed as policymakers confront renewed inflationary pressures.
