The Bank of England is expected to hold interest rates steady at 4.75 per cent on Thursday after it was revealed that inflation in November rose to 2.6 per cent, above the central bank’s target.
The Office for National Statistics revealed inflation had risen to 2.6 per cent from 2.3 per cent, pushed higher by pricier petrol and clothing.
The central bank uses higher interest rates as a tool to try and tame inflation, forcing families to spend more on borrowing rather than pushing up the prices of goods.
Another pressure on inflation comes from rising wages. Pay packets are now growing at 5.2 per cent, up from 4.9 per cent three months ago, according to data from the Office for National Statistics released earlier this week.
Money market traders have pushed back their expectation of a rate cut to May. Previous market activity suggested that a cut could have come in March.
Commercial lenders like high street banks and building societies use the bank base rate as a guide on how much to charge borrowers and how much to reward savers.
If you are just joining us, we are counting down to noon, to see which way the Bank of England will go on interest rates. Centre for Economics and Business Research Senior Economist Charlie Cornes thinks they will be held at 4.75 per cent.
Mr Cornes said: “CPI inflation in the UK rose for a second consecutive month in November, to 2.6 per cent, driven by higher prices for motor fuels and clothing. Meanwhile, core and services inflation, both indicators carefully monitored by the Bank of England (BoE) as measures of underlying price pressure, remain elevated, at 3.5 per cent and 5.0 per cent respectively. He said recent wage growth data are “all signs are pointing towards the BoE holding off on cutting interest rates.” “Instead, Cebr maintains that the next rate cut will be in Q1 2025.”
Higher inflation pushed the pound down, which aided valuations for FTSE 100 companies, many of which earn on dollars and euros, being massive multinationals.
“A weaker pound following the latest UK inflation figures gave a boost to the FTSE 100 and its bounty of dollar earners. The UK index rose 0.2 per cent to 8,208, led by Shell and BP, with Ashtead among the big US-focused players giving support,” says Russ Mould, investment director at stock broker AJ Bell.
“UK inflation at an eight-month high sounds dramatic yet the annual 2.6 per cent rate is bang in line with expectations and core inflation, which excludes food and energy, at 3.5 per cent came in lower than the 3.6 per cent consensus figure.
“As such, we haven’t had what the market would describe as an ‘inflation shock’. That explains why shares in interest rate-sensitive sectors like housebuilding haven’t retreated on the latest figures.
Chancellor Rachel Reeves said there is “more to do” to combat cost-of-living pressures.
“I know families are still struggling with the cost of living and today’s figures are a reminder that for too long the economy has not worked for working people,” she said on Wednesday.
“Since we arrived real wages have grown at their fastest in three years. That’s an extra £20-a-week after inflation.
“But I know there is more to do. I want working people to be better off which is what our Plan for Change will deliver.”
What went up and down in the inflation figures from yesterday?
The rate of CPI inflation for food and non-alcoholic drinks, alcohol and tobacco, clothing and footwear, recreation and culture all edged higher over the year to November, compared with the year to October.
It follows a hike to tobacco duties at the end of October.
Petrol prices also rose by 0.8p per litre between October and November to stand at 134.8p per litre, and diesel prices increased 1.4p per litre to 140.5p per litre.
Overall prices across the transport sector fell by 1.1 per cent in the year to November, but at a slower rate than the 2 per cent fall in the year to October, meaning it was the biggest factor pushing inflation higher last month.
In better news, air fares tumbled by 19.3 per cent in November, largely driven by falls in ticket prices on European routes, the Office for National Statistics said.
Just to hedge our bets ahead of the announcement, traders in the financial markets are expecting about a 10 per cent chance of a rate cut, Investec Economics said on Wednesday
Rob Wood, chief UK economist for Pantheon Macroeconomics, said: “Inflation rising above the MPC’s (Monetary Policy Committee’s) target is one reason why we expect rate-setters to cut interest rates gradually.”
Rate cuts next year are far more likely, assuming inflation is brought to heel.
Rates have been on a merry journey since the financial crisis, when borrowing was close to free for some debtors, including various governments.
The record high was 17 per cent in November 1979, which remained the rate until July 1980.
The record low was 0.1 per cent in March 2020 in the wake of Covid.
From 1719 to 1822 rates were fixed at 5 per cent.
What this means for mortgages
Sarah Coles, head of personal finance, Hargreaves Lansdown says:
“Mortgage rates have struggled to settle in recent weeks, with each piece of economic news – and each utterance from the Bank of England – sending rates slightly up or down within a fairly narrow range.
“Higher inflation is likely to mean another small fluctuation upwards in fixed rates, but given that rate expectations should remain largely unchanged, there’s every chance it’s nothing to write home about. We could see average 2-year fixed rates remain about the 5.5 per cent point.
“This is more bad news for buyers, faced with record-high prices and relatively high mortgage rates that show no sign of significant easing. The HL Savings & Resilience Barometer shows that people in their early 30s have the biggest sums outstanding on their mortgage – with 45% more mortgage debt than people in their early 50s – so they may be at most risk of being overstretched.
If you’re in the market for a remortgage, there’s no sign of imminent relief either. And with some uncertainties remaining about the trajectory of rates and inflation, it may be worth locking in a rate as soon as you can. That way if rates fall, you can shop around, and if they’re higher when your remortgage rolls around, you’ll have secured a better rate.”
Economics Expert, Professor Andrew Angus at Cranfield School of Management is also sceptical about any rate cut.
“A combination of increased public spending, infrastructure investments and the approaching winter is expected to drive inflation higher, making an interest rate cut this Thursday about as likely as a White Christmas.
“Despite predictions of economic growth, a palpable sense of uncertainty remains about how businesses will cope in the wake of the recent budget. Many are already feeling the pinch from rising costs, including higher business rates, increased minimum wages and National Insurance contributions, which may overwhelm many businesses. With an early Christmas present in the form of a rate cut off the cards and the next announcement not due until February, businesses will be eager to see how the Bank of England acts to promote stability and growth.”
One thing CPI inflation does not capture is housing costs, which are also rising. Although this is more closely linked to supply.
Annual growth in UK house prices and rents has accelerated, with rental price inflation in England and London hitting record highs, according to official figures.
The average house price increased by 3.4% in the 12 months to October, ticking upwards from 2.8% in September, according to Office for National Statistics (ONS) data. The report also showed annual growth in private rental prices accelerated to 9.1% in November, from 8.7% in the 12 months to October.
ONS head of housing market indices Aimee North said: “Rental prices climbed again in the year to November with the average private rent in Great Britain now around £1,300 per month.