Tags: EU | Britain | Economy

UK Interest Rates Set to Rise as Inflation Hits 3 Percent

Tuesday, 17 October 2017 06:04 AM

LONDON (AP) — Inflation in Britain has hit 3 percent for the first since early 2012, official figures showed Tuesday — a development that reinforces expectations that the Bank of England will raise interest rates next month for the first time in a decade.

The Office for National Statistics said consumer price inflation was 3 percent in the year to September, up from the previous month's 2.9 percent. The increase, which brings the rate to its highest level since March 2012, was widely anticipated in the markets and was largely due to rising prices for food and a range of transport costs.

If it had risen any further, Bank of England Governor Mark Carney would have 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.

Though he's spared that letter-writing, Carney and the 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. September's inflation figures were the last before the meeting, giving the numbers even more clout. After the last meeting, when seven of the nine panel members voted for unchanged rates, Carney put financial markets on notice that interest rates were likely to rise in the "coming months."

"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 rise in rates comes despite signs 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 down 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 up 0.1 percent at $1.3268.

One of the main reasons why inflation has spiked over the past year is related to the pound's sharp fall since the country voted to leave the European Union in June 2016. The 15 percent or so drop in the pound against a range of currencies has ratcheted up the cost of imported goods such as food and energy. Inflation has actually trebled in the year from September 2016, when inflation was just 1 percent.

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 pressure from this depreciation will start to wane in coming months," Silvana Tenreyro, one of the newest members on the Bank of England's nine-member rate-setting panel, told lawmakers.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said inflation is likely to peak at 3.1 percent in October and return to target by late 2018, "discouraging" the Bank of England from raising interest rates more than once over the next 12 months.

Though the central bank's upcoming economic projections, released on the day of the next rate-setting meeting, are set to show growth remaining weak and inflation edging lower, many economists think the bank will raise interest rates to give itself room to cut them in the future should the Brexit discussions fail to make headway and the economic outlook darkens further. Also, there is a belief that the bank will lose credibility if once again it puts the market on notice for a rate hike and fails to deliver.

Carney, who is due to address lawmakers Tuesday, has stressed that interest rate rises, when they come, will be modest and gradual, partly because of the uncertainty surrounding Brexit.

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Inflation in Britain has hit 3 percent for the first since early 2012, official figures showed Tuesday - a development that reinforces expectations that the Bank of England will raise interest rates next month for the first time in a decade.The Office for National...
EU,Britain,Economy
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2017-04-17
Tuesday, 17 October 2017 06:04 AM
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