Bailey clears the way for an Xmas rate hike

InflatIon figures are out tomorrow in what many top economists believe will be the final reading before a preChristmas interest rate rise.

analysts believe inflation will come in at 3.9pc for october, above the 3.1pc recorded in September, and far outstripping the Bank of England’s 2pc target.

the Bank’s Monetary Policy Committee (MPC) decided against an interest rate rise this month – despite giving every indication it would – but many believe the committee is unlikely to ‘bottle’ it again in December.

analysts at Deutsche Bank have pencilled in a ‘big jump’ in the inflation report, driven by a surge in food and energy prices. Michael Hewson, chief market analyst at trading firm CMC Markets, said: ‘It’s not inconceivable we could see a move on the headline number to 4pc.

He said: ‘a big rise in this week’s october numbers will merely serve to shift the focus back on the Bank of England, and the potential for a possible rate move in December – though whether markets start to price such an outcome remains open to question after the shambles we saw at the beginning of the month.’

talk of a rate hike comes as Bank of England governor andrew Bailey (pictured) told the Commons treasury committee yesterday that a major hurdle for an interest rate hike may have been cleared. When the Bank left interest rates at their rock-bottom of 0.1pc, Bailey said he needed more evidence that the end of the furlough scheme in September had not resulted in a wave of job losses.

a rise in unemployment, combined with climbing interest rates, could hit household finances and weaken the economy.

But fresh data released over the last fortnight indicates that there has been little rise in joblessness since the furlough scheme ended, raising the chance that the Bank will hike rates to 0.25pc.

the rise in inflation over the last few months has been driven by supply chain hold-ups and soaring energy prices, rather than fierce demand for goods. this has led Bailey to cast doubt on how effective a rate hike would be in taming price rises. But yesterday he admitted to MPs that he was ‘very uneasy’ about the current levels of inflation, adding that ‘every meeting is in play’ when it came to lifting interest rates.

Despite Bailey’s inflation worries, he played down fears that the UK is headed towards a 1970s-style environment where the cost of living spirals out of control.

Even Michael Saunders, an MPC member who did vote for a rate rise at the meeting, told MPs there was little chance of a ‘wage price spiral’ – where businesses are forced to pay their workers more, which in turn causes the cost of living to jump as retailers put up their prices.

Catherine Mann, another member of the MPC, said households will be spending even more of their income on food and energy as costs are expected to rise further next year.

this would limit the amount of money that people can spare for other shopping, which could in turn weigh on businesses’ ability to pass on higher costs to their customers. all of this could ‘put a damper’ on inflation over the medium-term, she added.

But Saunders worried that by holding off on a rate hike for too long, the Bank might eventually have to jack up rates faster and more sharply than it would otherwise have done.

While higher interest rates are good for savers, they weigh on mortgage holders and other borrowers who will see the costs of their debt rise.