Inflation in the UK rose sharply to a six-month high in October, above the BOE’s 2% target, scaling back bets that there will be further cuts in borrowing rates this year.
Inflation in the UK climbed more than expected in October to 2.3%, up from 1.7% in September, according to the Office for National Statistics (ONS), due to higher domestic energy bills.
Stubbornly high inflation in the services sector, which accounts for around 80% of the British economy, didn’t help either. In a monthly comparison, prices increased by 0.6%.
The jump means a decline in expectations of rapid interest rate cuts from the Bank of England.
What caused the price hike?
According to an analysis by Capital Economics, the rise in energy prices was due to a one-time effect of a 10% rise in Ofgem’s utility price cap, kicking in on 1 October, which was anticipated to add 0.6ppts to the inflation.
“The surprise was the failure of core inflation and services inflation to fall,” read the analysis. Consumer prices excluding energy, food, alcohol and tobacco rose slightly to 3.3% in the 12 months to October 2024, as did services, rising slightly from 4.9% to 5%.
Is the Bank of England going to cut rates further?
The current inflation level boosts bets on the market that there will be no more cuts from the Bank of England as the 2.3% inflation is above the BoE’s target.
Analysts at Capital Economist are pointing out, that the current price hikes are mainly due to one-time events. “Much of this overshoot in core inflation and services inflation, was due to a sharp rise in airfares inflation, which the Bank won’t consider a sign of stickier price pressures.”
But they are also expecting caution from the BoE, adding that, barring a major downside surprise in November’s inflation data (due on 18th December), the Bank will almost certainly leave rates unchanged at 4.75% at its next meeting in December.”
The market now expects just two more quarter-point decreases in 2025, with a 40% chance of a third.
Earlier this month, the bank cut its main interest rate by a quarter of a percentage point – the second in three months – after inflation fell to its lowest level since April 2021.
However, Bank Governor Andrew Bailey cautioned that rates wouldn’t be falling too fast over the coming months, partly because last month’s budget measures from the new Labour government would be likely to see prices rise by more than they would otherwise have done.
Interest rates dropped from pandemic highs
Central banks worldwide dramatically increased borrowing costs from near zero during the coronavirus pandemic when prices started to shoot up, first as a result of supply chain issues and then because of Russia’s full-scale invasion of Ukraine which pushed up energy costs.
As inflation rates have fallen from their highest levels, the central banks have started cutting interest rates. However, few economists think that rates will fall back to the super-low levels that persisted in the years after the global financial crisis of 2008-9.
In the UK Budget, Treasury chief Chancellor Rachel Reeves announced around £70bn (€84bn) of extra spending, funded through increased business taxes and borrowing. Economists think that the splurge, coupled with the prospect of businesses cushioning the tax hikes by raising prices, could lead to higher inflation next year.
The global inflation outlook has become more uncertain since Donald Trump was re-elected US president. He has indicated that he will cut taxes and introduce tariffs on certain imported goods when he returns to the White House in January. Both policies have the potential to be inflationary both in the US and globally, thereby keeping interest rates higher than they otherwise would have been.
“While we think the Bank of England will continue to cut rates in 2025, the pace of rate cuts is expected to be slower than previously anticipated, and rates may stay elevated for longer,” said Monica George Michail, an economist at the National Institute for Economic and Social Research to AP.
“This outlook reflects forecasted inflationary pressures stemming from the recently announced budget, in addition to heightened global uncertainty, particularly surrounding the Trump presidency,” she added.
