Analyst views: What the UK inflation data means for the Bank of England

UK inflation, as measured by the consumer price index, jumped to 4.2% in annual terms in October, well above expectations of a rise to 3.9%. The Office for National Statistics, which compiles the data, said the surge to an almost 10-year high was driven by increased household energy bills, a rise in the cost of second-hand cars and fuel, as well as higher prices in restaurants and hotels.

GBP initially strengthened in the aftermath of the data, with EUR/GBP dropping below 0.8400 to its lowest level since February 2020.

Bank of England impact
At the meeting earlier this month, the Bank of England decided to keep the Bank Rate unchanged at a record low of 0.1%, despite some strong signals that they would consider hiking rates. In a testimony to MPs earlier this week, the Bank of England Governor Andrew Bailey said all meetings are “live”, suggesting that they could raise interest rates when they meet next month.

The CME’s BoEWatch tool is showing markets are pricing in 100% probability of a rate hike in December. The tool uses MPC SONIA futures prices to gauge market expectations of the future course of BoE monetary policy.

What the analysts are saying
Here is a selection of views from analysts on what the inflation data does for Bank of England decision making.

Investec Economics’ Ellie Henderson
“With CPI inflation moving further away from the Bank of England’s 2% target, there is now even more pressure on the MPC to act to rein in price growth at its upcoming December meeting.

“Following this release, market expectations have also increased further out, pricing a 75% chance of a 25bp increase to 0.50% in February, as is our base case.”

AJ Bell Investment Director Russ Mould
“Inflation at a 10-year high of 4.2% makes for uncomfortable reading and goes to show the punishing effects of higher energy and food prices on family finances. It almost certainly means the Bank of England will raise interest rates soon, potentially as soon as next month.”

Newsquawk Senior Market Analyst Adam Linton
“The latest inflation metrics further cement expectations for a move on rates next month after yesterday’s jobs data provided encouragement for the post-furlough labour market.”

interactive investor Head of Investment Victoria Scholar
“With inflation going full steam ahead, potentially heading up to 5% next year, pressure is mounting for the Bank of England, which held off from raising rates this month.

“The central bank wanted to see more data before potentially creating an unnecessary economic headwind through higher rates and this week’s data, which points to a tight labour market and an inflationary backdrop, underscores the need for steady rate increases starting sooner rather than later.”

Lloyds
“An extended period of above-target inflation and indications that the labour market remained strong after the furlough scheme ended means that a Bank of England interest rate rise next month remains in play.”

Pantheon Macroeconomics
“We expect the headline rate of CPI inflation to peak just shy of 5% in April, before falling back quickly over the remainder of 2022.

“We continue to think that CPI inflation will fall to about 2.5% in Q4 2022 and ultimately will undershoot the 2% target in 2023, enabling the MPC to raise Bank Rate only slowly over the next year.”

KPMG Chief Economist Yael Selfin
“Today’s inflation data will reinforce the Bank of England’s resolve to act.”

CMC Markets Chief Market Analyst Michael Hewson
“Today’s data is a huge embarrassment for the Bank of England whose procrastination over a modest 0.15% rate rise earlier this month, now makes it odds on that all the pre-Christmas headlines will be of the Bank of England steals Christmas variety, if they do bite the bullet and belatedly nudge rates higher.”

Berenberg Economist Kallum Pickering
“The upside surprise in the October inflation data supports our expectation that the BoE will hike the bank rate by 15bps to 0.25% at its next MPC meeting on 16 December.”

Caxton Head of Market Intelligence Michael Brown
“4 handle on CPI…you’d expect that seals the deal for a Dec BoE hike but no guarantees.”

Daily FX Market Analyst Justin McQueen
“UK CPI and initial indications of post Furlough jobs data gives greenlight for Dec 15bps hike.”

Analyst views: What the UK inflation data means for the Bank of England
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