Interest Rate Rise: Pace Of Price Rise Remain Faster In The UK

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UK (Parliament Politic Magazine) – There is a prevailing belief among financial experts in the City that Bank of England policymakers are likely to implement another interest rate hike. However, the outcome of this decision heavily relies on the latest official price data, which will be released this week, and the rate at which inflation is decreasing.

Financial markets are currently predicting an 80% probability of a 0.25 percentage-point increase, bringing the interest rate to 5.5%, during the next meeting of the Bank’s monetary policy committee (MPC) on 21 September.

Central Bank Facing Significant Pressure To Reduce Inflation

The central bank is facing significant pressure to reduce inflation to its target of 2% following a substantial surge in the consumer prices index (CPI) last year, which exceeded five times the desired rate. Although the UK’s annual inflation rate declined to 7.9% in June from 8.7% the previous month, the magnitude of this drop surprised many economists in the City. Nevertheless, the rate of price increases in the UK remains higher than that of most developed nations.

In France, the inflation rate stands at 5.3%, while in Germany it is slightly higher at 6.8%. The average inflation rate for the eurozone is 5.5%. On the other hand, the United States has experienced fluctuating inflation, hovering around the 3% mark. Recent figures revealed a slight increase to 3.2% in July.

Huw Pill, a member of the Monetary Policy Committee (MPC) and the Bank’s chief economist, recently expressed his belief that the Bank’s 14 consecutive interest rate hikes, which have brought rates to their highest level in 15 years, have been effective. He suggests that the rising cost of borrowing has successfully curbed spending among businesses and households.

Inflation To Decrease Below 5%

According to the Bank’s latest report, inflation is projected to decrease to below 5% by the end of the year, assuming that interest rates reach a peak of 6%. However, analysts interviewed by the Observer argue that a peak of 5.5% may be sufficient to achieve this target.

Samuel Tombs, an economist at Pantheon Macroeconomics, anticipates a drop in inflation to 6.8% in July following the energy price cap reduction implemented by Ofgem on July 1st.

Overall, these statistics highlight the varying inflation rates across different countries and the measures taken to control them. The Bank’s efforts to raise interest rates have shown promising results, with inflation expected to decline in the coming months. However, experts suggest that a slightly lower peak rate may be enough to achieve the desired inflation target.

The price cap, which sets a limit on the amount suppliers can charge for gas and electricity per unit, has been reduced to £2,074 per year for a typical household that purchases both utilities from the same supplier. This is a decrease from the previous cap of £2,500 set by the government’s energy price guarantee.

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Labor Market Figures Closely Being Monitored 

In addition to the price cap, the decrease in petrol and diesel prices over the past year has also contributed to a decline in inflation. However, this downward trend is expected to last for only one more month.

At the Bank, Pill will be closely monitoring the upcoming labor market figures, particularly data on earnings. Analysts were taken aback last month when the May figures revealed a significant increase in average pay, with a 7.6% jump. This surge was primarily driven by a 9.2% rise in earnings among workers in the finance and business services sector.

The Bank anticipates that earnings have accelerated to a level surpassing inflation, indicating a positive trend. During the most recent meeting, the deputy governor, Ben Broadbent, expressed his belief that the increase in wages signifies the end of declining living standards.

Broadbent also expressed concern that if wages continue to rise, it could lead to a feedback loop, causing prices to increase once again. However, it is important to note that wage data reflects the situation from six months or more ago, when wage agreements were made.

Sandra Horsfield, a senior economist at Investec, predicts that inflation will decrease to 4% by the year-end and continue to decline, aligning with the decrease in wage growth. Her primary concern revolves around the volatile global energy markets, which have the potential to cause a surge in prices, even without an escalation of the conflict in Ukraine.

Beth Malcolm

Beth Malcolm is Scottish based Journalist at Heriot-Watt University studying French and British Sign Language. She is originally from the north west of England but is living in Edinburgh to complete her studies.