Bank of England eyes rate rise as inflation surges

Bank of England eyes rate rise as inflation surges

British inflation has risen sharply in recent months as a Brexit-hit pound raised import costs. (AFP/Adrian DENNIS)

LONDON: The Bank of England on Thursday (Sep 14) hinted at an interest rate rise in the coming months as a Brexit-hit weak pound sends inflation soaring.

Policymakers voted 7-2 to hold the BoE's main rate at a record-low 0.25 per cent - and unanimously to leave unchanged the level of cash pumping around the UK economy to help boost growth - minutes from a regular meeting on Wednesday showed.

Two members felt that a quarter-point hike should occur immediately, against a backdrop of the annual British inflation rate surging to 2.9 per cent in August from 2.6 per cent in July.

Analysts remarked that despite no change to the rate at September's meeting, the tone of the minutes indicated that the BoE was readying for a rate rise - in a policy that would mirror expected monetary tightening in the eurozone and United States in response to firmer economic growth.

Paul Hollingsworth, economist at Capital Economics research group, said "it is clear that the majority of members are reluctant to begin normalising monetary policy until there are some clearer signs of a pick-up in underlying inflation, including faster wage growth".

He added on Thursday: "Nonetheless, the minutes struck a considerably more hawkish tone than in August in suggesting that 'some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to (its 2.0 per cent) target'".

The tone of the minutes resulted in the pound hitting a fresh year-high at US$1.3372.

British inflation has risen sharply in recent months as a Brexit-hit pound raised import costs.

"There remain considerable risks to the outlook, which include the response of households, businesses and financial markets to developments related to the process of EU withdrawal," the minutes added.

While overall inflation is on the rise, wage growth in Britain has stalled, offsetting official data this week showing that the UK unemployment rate has fallen to a new 42-year low.

The jobless figure dropped to 4.3 per cent in the quarter through to the end of July, reaching the lowest level since 1975, the Office for National Statistics said on Wednesday.

Despite the strong jobs growth, there is concern that weak wages growth is starting to hurt consumption, making it difficult for the BoE to rush through interest-rate tightening that would boost savers but weigh on borrowers.

BOE CATCHES UP

"The Bank of England threw its name into the hat of central banks that could still raise interest rates this year," said Craig Erlam, senior market analyst at Oanda trading group.

"With the BoE now joining the Bank of Canada and the Federal Reserve is contemplating rate hikes and the ECB looking to withdraw more stimulus, it's going to be a very interesting end to the year," he added.

In the United States, Federal Reserve policymakers have twice raised rates in 2017 but a third rate hike this year is becoming less likely because inflation has failed to rise fast enough despite persistent jobs growth.

Meanwhile in the eurozone, the European Central Bank left interest rates and its mass bond-buying stimulus programme unchanged last week.

ECB President Mario Draghi said its governors would decide in October on the next steps for their "quantitative easing" (QE) programme that is slated to expire at the end of the year.

Source: AFP/de