Share

UK interest rates set to rise as inflation hits 3%

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

The Office for National Statistics said consumer price inflation was 3% in the year to September, up from the previous month's 2.9%. 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% 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 at the bank's rate-setting panel are expected to raise the benchmark rate by a quarter percentage point from the record low of 0.25% at the next policy meeting on November 2. September's inflation figures were the last ones before the meeting, which will give the numbers even more clout.

"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.

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% 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%.

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, the newest member on the Bank of England's nine-member rate-setting panel, told lawmakers. "We will be back to normal, let's say, in terms of the trade-off without that depreciation effect."

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said inflation is likely to peak at 3.1% 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 on Tuesday, has stressed that interest rate rises, when they come, will be modest and gradual, partly because of the uncertainty surrounding Brexit.

SUBSCRIBE FOR FREE UPDATE: Get Fin24's top morning business news and opinions in your inbox.

Read Fin24's top stories trending on Twitter:

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
19.00
-0.5%
Rand - Pound
24.02
-0.5%
Rand - Euro
20.51
-0.2%
Rand - Aus dollar
12.34
+0.1%
Rand - Yen
0.13
-0.6%
Platinum
900.15
+0.4%
Palladium
1,000.00
-0.2%
Gold
2,209.06
+0.7%
Silver
24.59
-0.2%
Brent Crude
86.09
-0.2%
Top 40
68,122
+0.7%
All Share
74,310
+0.5%
Resource 10
56,908
+2.2%
Industrial 25
103,615
+0.3%
Financial 15
16,488
-0.2%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders