Steady inflation in UK creates doubt about more interest-rate hikes
London — British inflation unexpectedly held steady in October, wrong-footing the Bank of England and raising fresh questions about how fast the central bank will follow up on this month’s interest-rate hike.
The annual rate of consumer price inflation (CPI) was unchanged from September’s five-and-a-half-year high of 3.0%, official data showed.
When the central bank raised rates for the first time in a decade in early November, it said it expected inflation would hit 3.2% in October before starting to fall slowly towards its 2% target. "Red faces all round as UK inflation fails to rise as widely expected, not least by the Bank of England," said Chris Williamson, chief business economist at financial data company IHS Markit.
Sterling fell against the dollar and British government bond prices rose as markets lengthened the odds slightly on a new rate hike in the foreseeable future.
Most economists polled by Reuters after the November 2 rate rise said they did not expect the central bank to raise rates again until 2019. On Tuesday, financial markets — which tend to take a more hawkish view — priced in no increase until late 2018.
While inflation in many developed countries remains weak, in Britain it has surged from just 0.5% at the time of the June 2016 vote to leave the EU, as the fall in the pound pushed up the cost of imported goods. October’s data showed that lower fuel-price inflation was offset by the biggest rise in food prices since September 2013.
Many economists have said this month’s rate rise was unnecessary because of the slowing domestic economy, weak productivity and wage growth, as well as uncertainty about Britain’s future trade relationship with the EU. Economists polled by Reuters expect wage data due on Wednesday to show pay growth stuck at just more than 2%.
The central bank argues that leaving the EU will damage Britain’s ability to grow as fast as before without generating excess inflation, and that the lowest unemployment rate since 1975 makes labour shortages and a rebound in wage growth a risk.
This month’s rate rise was not aimed at directly curbing the recent surge in inflation but at ensuring above-target inflation does not become too entrenched in Britain, especially as the US and eurozone begin to tighten monetary policy, which could further weaken the pound.
The central bank has said it still expects inflation to be slightly above target in three years’ time. On Tuesday, the central bank’s Mark Carney reiterated that he was allowing inflation longer than normal to return to target due to the Brexit uncertainties.
Paul Diggle, a senior economist at Aberdeen Asset Management, said inflation would pick up again due to rising oil prices and residual effects of the weaker pound. "The Bank of England is stuck between a rock and a hard place. On balance, we think [it] will have to hike interest rates at least once more next year."
Retail price inflation, a measure used to calculate payments on government bonds and many commercial contracts, hit a near six-year high of 4%, bad news for Hammond who is due to announce a budget plan on November 22. But other data showed that underlying price pressures are easing. Costs of manufacturers’ raw materials rose at their slowest pace since July 2016, a month after the Brexit vote.
Said Investec economist Philip Shaw, "Our baseline case is that CPI inflation has now topped out."