Could interest rate increases be ahead?
A jump in the UK’s annual inflation rate in July may have upped the stakes for the Bank of England as it ponders its next interest rate decision, but a cooling labour market could keep the central bank on hold for now.
The Office for National Statistics said inflation rose to 2.9% in July, spurred mainly by rising gas and electricity prices as the Iran war continues to spike the cost of fuel.
That would normally raise the odds of the central bank raising interest rates in an effort to return inflation to its 2% target. But the jobs market lost steam in the year’s second quarter, official data showed this week, suggesting the economy isn’t in danger of overheating and potentially reducing the need for rate hikes.
Yesterday, ING developed markets economist James Smith said the bar “is still relatively high for a rate hike” this year, unless energy prices continue to ramp up in the coming months.
“The basic story here is that the jobs market is cool,” Smith wrote. “We can see that in the vacancy numbers, which are still gradually falling and are well down on pre-Covid levels. We can see that in the unemployment rate, notwithstanding the latest reliability issues.
“And crucially for the Bank of England, there is little sign that wage growth is about to turn higher. Barring a severe and persistent spike in energy prices, we think the Bank will keep rates on hold until next spring, before cutting rates at least twice in 2027.”
That analysis suggests the Bank is unlikely in the short term to deviate from its current wait-and-see approach to rates – and that rate reductions, rather than increases, are its most likely moves next year.
Experts see events in Iran as having a crucial say on the UK’s inflation outlook and the Bank’s path ahead.
After its last decision in July, the central bank’s governor Andrew Bailey said prolonged oil price increases could force its hand on interest rates. “If we get a continuation of this conflict going on and oil prices stay above $100 a barrel… the odds are that interest rates will have to go up higher,” he told the BBC.
When the BoE’s Monetary Policy Committee (MPC) changes the base rate, high street lenders typically move their own mortgage rates in response because their cost of borrowing from wholesale money markets rises.
That means central bank rate hikes typically make variable-rate and tracker mortgages more expensive almost immediately, while fixed-rate deals tend to price in anticipated future rate moves more gradually.
The central bank’s next decision is scheduled to arrive on September 17, with two further announcements pencilled in after that – on November 5 and December 17.
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