THE UK’s inflation woes have intensified with a further rise in the annual rate to a five-year high of three per cent.
Not surprisingly, news of this latest increase yesterday jangled nerves over whether it might prompt the Bank of England to raise UK base rates from their record low of 0.25 per cent at the Monetary Policy Committee’s next meeting on November 2.
Normally, the decision would probably be straightforward enough for the MPC. Annual UK consumer prices index inflation, which rose to three per cent last month from 2.9 per cent in August, has surged from just 0.3 per cent in May last year, ahead of the Brexit vote.
However, the decision in this case is not straightforward.
The surge in inflation, resulting in large part from sterling’s understandable post-Brexit vote weakness, has led to further misery for households by triggering a renewed fall in wages in real terms.
It says a great deal about the extent of UK economic weakness that many in the business community are worried about even a quarter-point rise in benchmark interest rates.
Scottish Chambers of Commerce urged against such a move. Its concern is understandable given UK growth has slowed to a crawl this year, as the Brexit vote has compounded weakness caused by years of austerity.
The vote has dampened business investment. And it has resulted in a sharp slowing of consumer spending growth as households deal with the renewed drop in real-terms income, at a time when looming exit from the European Union is making many companies reluctant to award significant nominal pay rises.
The Bank of England is on the horns of a dilemma. It has a Treasury-set target of two per cent for annual UK CPI inflation.
Governor Mark Carney is right when he makes it clear the Bank cannot be expected to offset all of the negative impacts of Brexit. Even if it could, that is not the Bank’s job.
However, it was interesting to see the pound fall yesterday as comments from MPC members to the Treasury Select Committee signalled a November 2 rate rise was far from a done deal.
A Bank statement, following the MPC’s September meeting, signalled most of the nine-strong committee were minded to raise rates in “coming months”.
It was interesting to hear Bank deputy governor Sir Dave Ramsden tell the Treasury Select Committee he was not among this majority. Specifically, Sir Dave noted there was little sign of inflation building in the labour market.
Fellow MPC member Silvana Tenreyro indicated her view that a rate rise might be justified in coming months was “very contingent on the [economic] data”.
Mr Carney said the Bank still had to balance the desirability of supporting jobs and activity with above-target inflation.
Other complications for the MPC include a surge in unsecured consumer debt, no doubt supported by rock-bottom interest rates.
As the prospect of Brexit weighs heavily on the UK economy, the case for a rise in interest rates next month is far from watertight.
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