October’s inflation data was even higher than analysts had expected. The pound rose against the dollar and reached its highest level against the euro since February 2020, as investors are betting on a rise in the country’s interest rates.
“The positive surprise in the October inflation data supports our expectation that the Bank of England will raise the bank rate by 15 basis points to 0.25% at its next monetary policy committee meeting on December 16,” wrote Kallum Pickering , senior economist at Berenberg, in a note.
Higher official interest rates can increase the cost of borrowing for businesses and families, as well as encourage people to save more, taking some of the heat off inflation.
The Bank of England cut interest rates to a record low of 0.1% in March 2020 as part of a package of emergency measures to support the economy after activity collapsed as a result of the pandemic.
Investors had expected the UK central bank to start raising rates when it met earlier this month.
Instead, it chose to stay the course while waiting for more data on the labor market, fearing that unemployment could rise due to the end of government support to employers due to Covid-19.
Some of those concerns may have been eased by news on Tuesday that unemployment in the country dropped to 4.3% in September, even as the country’s leave program ended.
“When combined with the latest labor market release, the larger-than-expected jump in inflation in October makes an interest rate hike in December even more likely,” said Paul Dales, chief economist at Capital Economics.
Inflation is now double the Bank of England’s 2% target, while economic growth is slowing, raising the specter of a period of “stagflation”. The chief economist of the central bank itself has already warned that inflation could rise above 5% in early 2022.
Transport costs played a big role in the latest rise in inflation. The UK Office for National Statistics said on Wednesday that average gasoline prices — which hit a record late last month — jumped 22% in the year to October, to 138.6 pence per liter (about $8, 50 per gallon).
Reference: CNN Brasil
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