The Bank of England is expected to overlook persistent inflation by keeping interest rates unchanged.
The city predicts that the Bank of England will once again hold interest rates steady, as inflation remains unchanged.
- In September, the Consumer Price Index (CPI) remained steady at 6.7% due to an increase in inflation for services.
- The value of the British pound increases, but predictions in futures markets indicate that interest rates will reach a maximum of 5.25% by the end of the year.
- The Bank of England may contemplate additional interest rate increases in the coming year.
Analysts believe that despite inflation not decreasing as predicted in September, the Bank of England is unlikely to raise interest rates next month due to persistent cost pressures.
The Office for National Statistics revealed that consumer price inflation remained unchanged from the previous month at 6.7 percent in September. This was slightly higher than the predicted 6.6 percent, as the decrease in food and goods prices was counterbalanced by an increase in energy costs.
It follows the decision made the BoE’s last Monetary Policy Committee meeting in September, when the bank brought an end to 14 consecutive rate hikes with a pause at 5.25 per cent.
BoE Governor Andrew Bailey is faced with a challenging situation as inflation proves to be more persistent than anticipated.
The increase in interest rates has significantly raised the cost of borrowing, which has had a negative impact on economic growth and has put pressure on consumers, businesses, and the government. However, these rate hikes have not yet succeeded in achieving the Bank of England’s goal of 2 percent inflation.
The pound strengthened on Wednesday morning after the inflation rate was higher than expected. This reversed the previous decline caused by yesterday’s wage growth data. It indicates that foreign exchange markets are becoming more wary of another rate increase by the Bank of England.
Rob Morgan, chief investment analyst at Charles Stanley, said: ‘There are two more interest rate announcements to come this year on 2 November and 14 December.
Despite the fact that wage growth remains strong and there has been a slight increase in fuel prices, it is probable that the Bank of England will continue to hold off on raising interest rates for now in order to assess additional economic and inflation data.
Today’s inflation report will likely indicate that an additional adjustment to the interest rate will be necessary, causing some unease.
Flat: Inflation has remained at 6.7% in both August and September
However, ING’s developed markets economist, James Smith, stated that the inflation data released on Wednesday does not contain significant factors that would compel the Bank of England to resume its rate hike cycle.
The Bank of England (BoE) has been paying close attention to the inflation in British services, which has been a significant factor contributing to overall inflationary pressures this year. The BoE might not be pleased to observe that it increased from 6.8 percent to 6.9 percent in September.
However, Smith mentioned that the prices of “volatile package holidays,” which are part of the services data, have played a significant role in this matter. Despite this, services inflation is still below the Bank of England’s projected rate of 7 percent in August.
He stated: ‘We believe that inflation in services will gradually decrease throughout the rest of the year, possibly reaching 6 percent by the end of 2023. Admittedly, this is not a significant improvement, but it aligns with survey findings indicating that fewer companies are increasing prices and those that do are doing so less aggressively.
‘For headline inflation, of course, October will see another step lower as last year’s steep increase in household energy bills drops out of the annual comparison
Since there were no significant surprises in yesterday’s wage data or today’s services inflation data, we believe that the Bank will be satisfied with maintaining the current interest rates in November.
According to futures market pricing on Wednesday morning, it is indicated that Britain will reach its highest interest rate peak in 2023, which will be approximately 10 basis points higher. This suggests that there might be another pause in November at a rate of 5.25 per cent.
Janet Mui, the head of market analysis at RBC Brewin Dolphin, stated that the Bank of England can find comfort in the slowing wage growth and clear indications of a loosening labor market, as these suggest that the underlying inflation pressure is likely to decrease.
The likelihood of the Bank of England increasing interest rates before the year ends has slightly increased according to the report, although the general consensus in the markets is that the bank has finished raising rates.
However, senior personal finance analyst at Interactive Investor Myron Jobson cautioned that while interest rates ‘might not need to go up further for the time being’, it is not necessarily the end of the hiking cycle.
He stated that the policymakers of the Bank of England are expected to maintain the possibility of increasing interest rates until they feel more certain about controlling the increasing prices.
In September, the Bank of England decided to halt its cycle of increasing interest rates at 5.25%.
