Interest rate decision hangs in the balance as inflation sticks

The Bank of England’s next interest rate decision hangs in the balance as policymakers weigh concerns about wage inflation against evidence that the UK economy is stagnating. 

According to data released on Wednesday, the headline rate of inflation remained unchanged at 6.7 per cent, with fuel prices making a large upward contribution to September’s annual rate. The rate of core inflation decelerated from 6.2 to 6.1 per cent. 

Wages are now growing significantly faster than prices, fuelling fears that high inflation is becoming embedded in the economy. Regular pay growth appears to have peaked, but remains at near-record levels at 7.8 per cent.

Crucially, September’s inflation figures still came in below the BoE’s August projections. Yael Selfin, Chief Economist at KPMG UK, said that the positive overall outlook for inflation should be “sufficient for the Bank of England to keep interest rates on hold as it takes stock of the impact of past tightening”. Forecasters expect the inflation rate to fall below 5 per cent next month as last year’s energy price spikes roll off calculations. 

As a result, rate-setters will be highly attuned to the risk of tightening policy too far. Data shows that the UK economy stagnated over the summer, with GDP growing by just 0.3 per cent between June and August. Earlier this month, BoE chief economist Huw Pill said that “whether we’ve done enough or whether we have more to do, I think is becoming a more finely balanced issue”. Rate-setters were deeply divided in September’s meeting, and another vote split looks likely on 2 November.

Though market pricing implies a small chance of further tightening, many economists think that interest rates will be held constant again at 5.25 per cent. Following Wednesday’s inflation release, PwC economist Jake Finney, said that he expects the Bank to downgrade its inflation projections in the November meeting, adding that this “should be enough to keep rates on hold again”.