Steady U.K. in­fla­tion leaves ques­tion mark over BoE’s tim­ing for in­ter­est-rate hike

The Globe and Mail (Alberta Edition) - - REPORT ON BUSINESS - DAVID MIL­LIKEN JONATHAN CA­BLE LONDON

Bri­tish in­fla­tion un­ex­pect­edly held sta­ble in Oc­to­ber, wrong-foot­ing the Bank of Eng­land that had fore­cast it would in­crease fur­ther and rais­ing ques­tions about how fast the Bank will raise rates in the fu­ture.

Con­sumer price in­fla­tion was un­changed from Septem­ber’s 51⁄2-year high of 3 per cent, of­fi­cial data showed on Tues­day.

When the BoE raised bench­mark bor­row­ing costs for the first time in a decade in early Novem­ber, it said it ex­pected in­fla­tion would hit 3.2 per cent in Oc­to­ber be­fore start­ing to fall slowly.

Ster­ling fell against the dol­lar af­ter the data and Bri­tish gov­ern­ment bond prices rose, as mar­kets length­ened the odds on the BoE fol­low­ing up this month’s hike with an­other one in the fore­see­able fu­ture.

“Red faces all round as U.K. in­fla­tion fails to rise as widely ex­pected, not least by the Bank of Eng­land,” said Chris Wil­liamson, chief busi­ness econ­o­mist at fi­nan­cial data com­pany IHS Markit.

“Today’s num­bers will dampen ex­pec­ta­tions on whether we will see fur­ther rate hikes any time soon.”

Bri­tish in­fla­tion has surged from just 0.5 per cent at the time of the June, 2016, vote to leave the Euro­pean Union as the fall in the pound pushed up the cost of im­ported goods.

Tues­day’s data spared BoE’s gov­er­nor Mark Carney the em­bar­rass­ment of hav­ing to write to fi­nance min­is­ter Philip Ham­mond to ex­plain how the BoE missed its 2-per-cent in­fla­tion tar­get by more than a per­cent­age point. But the fig­ures will add to crit­i­cisms from many econ­o­mists who said this month’s rate rise was un­nec­es­sary against a back­drop of a slow­ing do­mes­tic econ­omy and weak pro­duc­tiv­ity and wage growth.

With the worst of the Brexit im­pact on prices now past, the crit­ics of the BoE de­ci­sion saw lit­tle need to raise rates at a time when Bri­tain’s fu­ture trad­ing re­la­tion­ship with the EU re­mains highly un­cer­tain.

The Bank ar­gues that leav­ing the EU will dam­age Bri­tain’s abil­ity to grow as fast as be­fore with­out gen­er­at­ing ex­cess in­fla­tion, and that the low­est un­em­ploy­ment rate since 1975 makes labour short­ages and a re­bound in wage growth a risk.

It has said it still ex­pects in­fla­tion to be slightly above tar­get in three years’ time.

Paul Dig­gle, a se­nior econ­o­mist at Aberdeen As­set Man­age­ment, said in­fla­tion would pick up again be­cause of ris­ing oil prices and resid­ual ef­fects of the weaker pound.

“The Bank of Eng­land is stuck be­tween a rock and a hard place. On bal­ance, we think [it] will have to hike in­ter­est rates at least once more next year.”

A mea­sure of re­tail price in­fla­tion, used to cal­cu­late pay­ments on gov­ern­ment bonds and many com­mer­cial con­tracts, hit a near six-year high of 4 per cent, pro­vid­ing bad news for Mr. Ham­mond who is due to an­nounce a bud­get plan on Nov. 22. But other data showed that some un­der­ly­ing price pres­sures are eas­ing.

Costs of man­u­fac­tur­ers’ raw ma­te­ri­als – much of them im­ported – were 4.6 per cent higher than in Oc­to­ber, 2016, down from an in­crease of 8.1 per cent in Septem­ber. This was the low­est rate of pro­ducer in­put price in­fla­tion since July, 2016, a month af­ter the Brexit vote.

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