Bank of England expected to raise interest rates again after UK inflation only dips to 10.1% – business live

Here’s a breakdown of how costs have soared in the UK, from sugar to bread, and electricity to pet products, driving up inflation:

With UK inflation not yet back on track, the general consensus at the moment is that the Bank of England will need to hike by 25 basis points, or a quarter of one percentage point, at its May meeting, predicts Giles Coghlan, chief market analyst, consulting for HYCM.

The strong wage growth seen on Tuesday makes another interest rate rise more likely, Coghlan says [wages rose by a faster-than expected 6.6%, which meant real wage still fell].

He adds:

“The issue for the Pound and for the BoE is whether the latest data merits continued tightening.

The surge in average earnings will no doubt be sounding alarm bells that the dreaded wage-price spiral could become entrenched in the UK, which has moved the dial in favour of another 25bps hike when the monetary policy committee convenes next month.

Some investors are fearing that the dreaded wage-price spiral could be about to bite and it will be hard for the BoE to not hike rates next month”

Core inflation (stripping out food and energy) remains ‘stubbornly high’, says Debapratim De, senior economist at Deloitte:

“Inflation has come in above expectations. Food prices have risen at the fastest pace in over 45 years and even after excluding the effect of food and energy prices, residual inflation remains stubbornly high.

De adds that the Bank of England will want to see signs of broader easing of price pressures before contemplating interest rate cuts, cautioning that:

Interest rates seem likely to remain at their peak for longer than markets are expecting.”

The financial markets are pricing three more UK interest rate hikes over the next four Bank of England meetings, points out ING developed markets economist James Smith.

The Bank’s monetary policy committe is next due to set rates on 11th May, then 22nd June, 3rd August and 21st September (by when the markets now suggest rates could have risen to 5%, from 4.25% at present).

Smith says this “seems extreme,” though he agrees that a May interest rate increase is more likely than not.

As Smith explains:

The headline story from Wednesday’s UK inflation numbers is that core CPI stayed at 6.2%, having been expected to slip back towards 6%. Headline inflation unexpectedly stayed in double-digits at 10.1%, though that will start to change in April when the effect of last year’s electricity/gas price hike filters out of the annual comparison. We expect headline CPI to reach the 8% area next month, 5% by summer and roughly 3% around year-end on current trends.

“On paper that core inflation number looks pretty grim for the Bank of England ahead of its May meeting. But we need to remember that the Bank has been making a clear distinction between services and goods inflation over recent months. The former is seen as much more important for policymaking because trends in service-sector inflation tend to be more persistent and therefore relevant over a monetary policy horizon.

And when we cut out some temporary volatility earlier this year, the net effect of the past few months is that services inflation has stabilised. It came in at 6.7% in March, which is only fractionally higher than in February and in line with both our own and the BoE’s expectations at the time of the last meeting.

The Bank of England is failing ‘badly’ at controlling inflation, argues former BoE policymaker Andrew Sentance.

Sentance is calling for further interest rate increases to bring inflation into single-digit levels:

Pound up, FTSE 100 down after inflation data

Sky News’s Ed Conway shows here how the City now believes UK interest rates could hit 5% this year, up from 4.25% today:

Today’s CPI inflation reading of 10.1% for March 2023 is not good news for the Bank of England, says Professor Costas Milas, of the Management School at University of Liverpool.

He tells us:

The inflation reading could offer some hints on the next interest rate move. Notice that CPI inflation stood at 10.2% for 2023 Q1. This is higher than the Bank’s inflation forecast of 9.73%.

Inflation is therefore proving (much) more stubborn than what the Bank expects. So it make sense to expect that the Bank’s Monetary Policy Committee (MPC) will raise interest rates further to 4.5% on 11th May.

In fact, UK interest rates could potentially rise up to 4.75 per cent by the end of 2023. This is because high public expectations of inflation, currently at 3% two-years ahead compared with the Bank’s inflation expectations of less than 1% (!) are putting additional pressure on current inflation through demand for higher wages.

But, Professor Milas points out that interest rate predictions are “far from straightforward” especially in periods of elevated financial stress like we are currently experiencing.

He adds:

If, instead, financial stress worries take over, UK interest rates might end up below 4% by the end of 2023. Interesting times ahead!

The UK now has Western Europe’s worst inflation rate, points out Andy Bruce of Reuters:

Helia Ebrahimi of Channel 4 News shows how the UK has a bigger inflation problem than other major European economies:

Bank of England expected to raise rates in May

Policymakers urged to tackle ‘greedflation’

Here’s a breakdown of the price changes which kept UK inflation at 10.1% in March.

• Food and non-alcoholic beverages: 19.1%

• Alcoholic beverages and tobacco: 5.3%

• Clothing and footwear: 7.2%

• Housing, water, electricity, gas and other fuels: 26.1%

• Furniture, household equipment and maintenance: 8.0%

• Health: 7.1%

• Transport: 0.8%

• Communication: 3.7%

• Recreation and culture: 4.6%

• Education: 3.2%

• Restaurants and hotels: 11.3%

• Miscellaneous goods and services: 6.7%

Overall, goods prices rose by 12.8% in the year to March, while services inflation stuck at 6.6%.

BRC: poor harvests and weak pound pushed up food prices