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.
