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Monday, July 16, 2018

UK interest rates set to rise as inflation hits 3 percent

One of the main reasons why inflation has spiked over the past year is related to the pound's 15 percent or so drop fall since the country voted to leave the European Union in June 2016.

By: AP | London | Published: October 17, 2017 7:58:11 pm
inflation,  Bank of England, Philip Hammond, Brexit, UK bank interest rates, world market, market news, business news, indian express news Governor of the Bank of England, Mark Carney  (Source: AP) 

Inflation is set to rise above 3 percent in the next month or two, the Bank of England’s governor warned Tuesday, a cautionary note that reinforces expectations interest rates will soon rise for the first time in a decade. Mark Carney’s comment came after official data showed consumer prices rose 3 percent in the year to September, up from the previous month’s 2.9 percent rate. The increase, which took the rate to its highest since March 2012’s 3.5 percent, was anticipated in financial markets and largely due to rising prices for food and transport. If it had risen any further, Carney would have had to write to Treasury chief Philip Hammond explaining why inflation is more than a percentage point above the 2 percent target and what he and his colleagues at the central bank were going to do about it.

In testimony to lawmakers on Tuesday, Carney said he’s “more likely than not” to have to write that letter in October or November. It’s because of this above-target inflation that Carney and others on the bank’s rate-setting panel are expected to raise the benchmark rate by a quarter-point from the record low of 0.25 percent at the next policy meeting on Nov. 2. After the last meeting, when seven of the nine panel members voted for unchanged rates, Carney put financial markets on notice that rates were likely to rise in the “coming months” largely because of the inflation spike. However, he has stressed that rate increases, when they come, will be modest and gradual, partly because of the uncertainty surrounding Brexit.

“Today’s release has all but rubber-stamped a rate hike from the central bank at their next meeting,” said David Cheetham, chief market analyst at online trading firm XTB. The expected rate rise comes despite evidence that the British economy is faltering _ it is growing slower than any other Group of Seven industrial economy this year _ and that inflation is expected to ease back in coming months. The pound was little changed by the inflation numbers as most investors have already priced in a likely November rate hike. In late-morning trading, it was down 0.3 percent at $1.32.

One of the main reasons why inflation has spiked over the past year is related to the pound’s 15 percent or so drop fall since the country voted to leave the European Union in June 2016. That has ratcheted up the cost of imported goods like food and energy, trebling the inflation rate since September 2016.

However, the impact of the lower exchange rate on inflation is set to ease as the annual change of prices due to the pound’s decline drops out of the comparison. The central bank’s upcoming economic projections, released on Nov. 2 alongside the rate decision, are set to show growth remaining weak and inflation edging lower. But many economists think the bank should raise interest rates to give itself room to cut in the future in the event of a recession or financial shock. Others think it could lose credibility if it again fails to deliver on a rate hike it had hinted about.

The dilemma facing the bank was evident in testimony given by Dave Ramsden, its new deputy governor for markets and banking. He said he was not part of the majority at the last meeting who thought interest rates should head higher soon, largely because there is little evidence that inflation was boosting wages. Figures due Wednesday are set to show that wage gains are lagging inflation by about a percentage point, meaning household incomes are falling, a trend that has the potential to depress economic activity.

Carney put his weight behind the need for a transitional deal after Britain leaves the EU in March 2019. In a testimony to lawmakers, he argued that a disorderly exit from the EU is in no one’s interest, especially for financial firms that deal with complicated contracts and cross-border issues of insurance. He said financial issues are particularly acute for the EU as London is a major capital market for Europe but that he didn’t want questions relating to financial stability to be used as bargaining chips in Brexit discussions.

Fears of a “no deal Brexit,” which Treasury chief Hammond has warned could even see flights grounded, have ratcheted up in recent weeks as the talks between the British government and the EU have appeared to make little headway.

In a speech last month, Prime Minister Theresa May laid out her wish for a transition period lasting around two years after Brexit, during which Britain’s economic and trading relationships with the other 27 EU countries will remain largely as they are currently. A transition deal could also give both sides time to forge a longer-term trading relationship. “A transition agreement is in everyone’s interest,” Carney said.

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