UK interest rates to rise

Inflation is set to rise above three percent in the next month or two, the Bank of England’s governor warned Tuesday, a cautionary note that reinforces expectations interest rates will soon rise for the first time in a decade.

Mark Carney’s comment came after official data showed consumer prices rose three percent in the year to September, from the previous month’s 2.9 percent rate. The increase, which took the rate to its highest since March 2012, was largely due to rising prices for food and transport.

If it had risen any further, Carney would have had to write to Treasury chief Philip Hammond explaining why inflation is more than a percentage point above the two percent target and what he and his colleagues at the central bank were going to do about it.

In testimony to lawmakers on Tuesday, Carney said he’s “more likely than not” to have to write that letter in October or November.

It’s because of this above-target inflation that the bank’s rate-set- ting panel is expected to raise the benchmark interest rate by a quarter-point from the record low of 0.25 percent on Nov. 2. After the last meeting, when seven of the nine panel members voted for unchanged rates, Carney warned that rates were likely to rise in coming months largely because of the inflation spike. However, he has stressed that any rate increases would be modest and gradual, partly because of uncertainty surrounding Brexit.

“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 rate rise comes despite the fact that the British economy is faltering — it is growing slower than any other Group of Seven industrial economy — and that inflation is expected to ease 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 ear- ly-afternoon trading, it was down 0.3 percent at $1.32.

One of the main reasons why inflation spiked over the past year is the pound’s 15 percent or so drop fall since Britain voted to leave the European Union in June 2016. That ratcheted up the cost of imported goods like food and energy, trebling inflation since September 2016.

However, the inflationary impact of the lower exchange rate is set to ease as the annual change of prices due to the pound’s decline drops out of the comparison.

Despite that, many economists think the bank should raise interest rates to give itself room to cut in the future in the event of a recession or financial shock. Others think it could lose credibility if it fails to deliver on a rate hike it had hinted about.

One factor that could dampen expectations for further rate increases is sluggish wage growth. Figures due Wednesday are set to show that wage gains are lagging inflation by about a percentage point. /