Pressure will be on for the BoE to raise interest rates, if the U.K. CPI comes in at 3%, expect sterling to react if the forecast is met

Oct 16 • Mind The Gap • 97 Views • No Comments

On Tuesday morning, at 8:30am GMT, the U.K. official statistics agency (the ONS) will reveal the latest CPI figure in a series of inflation data, which will also include the RPI and producer price input inflation. The forecast is for CPI (consumer price inflation) to rise to a five year high of 3% annualized, with RPI (retail price inflation), rising to 4%. Producer price input is forecast to rise to 8.2%. This series of data, with wage increases only rising by approx. 2.1% YoY, will add to pressure and could deliver the necessary ammunition, for the Bank of England’s monetary policy committee to raise the U.K. interest rate for the first time in a decade, since the financial crisis of 2007.

The rate was lowered to 0.25% from 0.5%, shortly after the Brexit referendum result, at the same time the BoE governor Mark Carney also committed to make an extra £250b of Q.E. available, should the U.K. economy suffer any further detrimental impact from Brexit. The increased inflation has been directly caused by the referendum decision; as a service driven, consumer spending, importing country, that runs constant (and generally rising) deficits, the pound falling circa 10% versus the U.S. dollar and 14% versus the euro, since the June 2016 vote, has had a dramatic impact on the U.K. economic performance. Which is why Carney and the MPC are stuck between a rock and a hard place when considering raising the base rate to 0.5%. The consideration to raise rates will not improve economic performance, from GDP growth of 0.3% in the latest quarter, indeed it may harm growth, as consumers will find borrowing more expensive. Instead the rise would be purely defensive; to shore up the pound’s value, by ensuring the import costs of goods falls marginally, which will have little impact on the dominant service driven sector of the economy; unless wages rise, or prices fall considerably, consumers will have less to spend.

Economists from HSBC bank have predicted two imminent base rate rises; one to be announced in December, the other in May, which should (in theory) cause CPI to fall back to 2.5%. With perfect timing three members of the BoE are due to appear before a treasury select committee (govt and parliamentary law makers) as the inflation figures are released, to explain their management of the economy using monetary policy tools. The inference is that the timing of the appearance is no accident; that they have knowledge that the key inflation metrics have risen. Analysts and investors will therefore pay as much attention to the dialogue at the select committee hearing, as they will to the inflation figures.

U.K. KEY ECONOMIC DATA.

• Interest rate 0.25%
• CPI inflation rate 2.9%
• RPI inflation rate 3.9%
• GDP growth QoQ 0.3%
• Annual GDP growth 1.5%
• Wage growth 2.1%
• Retail sales growth 2.4%
• Composite PMI 54.1

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