The Bank of England came under further pressure to hike rates at its monetary policy committee meeting tomorrow as more evidence of inflationary pressures building in the UK economy emerged.
British firms were more likely to raise prices in October than at any time since records began in 1999, with a record number of businesses reporting a surge in operating costs.
The IHS Markit Composite Purchasing Managers’ Index (PMI) rose to 57.8 in October from 54.9 in September, well above an initial flash estimate of 56.8, but survey respondents cited ongoing fuel and labour shortages, and supply chain disruption as holding back business growth.
Despite also reporting a sharp increase in costs, services PMI also rose to a three-month high of 59.1, up sharply from 55.4 in September.
A knife edge interest rate decision looms from the bank’s MPC on Thursday
But, as a result of surging prices, business optimism in the services sector has now fallen to its lowest since January when the UK was still in lockdown.
The figures boost expectations that the Bank’s MPC will opt to hike interest rates on Thursday from the current record low of 0.1 per cent to 0.25 per cent, as inflationary pressure continues to be less ‘transitory’ than the bank had hoped.
Should the bank hike rates, research from audit, tax and advisory firm Mazars suggests UK households will face an immediate increase in interest payments of £900m for floating rate debt, such as credit cards and floating rate mortgages.
UK household expectations of a rate hike have risen rapidly
Partner at Mazars Paul Rouse said: ‘The UK household debt load is now so big, that even the most marginal increase in interest rates adds almost £1billion in extra costs almost overnight”
‘It is important that UK households are prepared for the impact of interest rate rises on their budgets.
‘Many households will have been using credit cards and payday loans to manage rising energy bills and mortgage or rent repayments. With interest rate increases, those payment methods start to become more expensive and unsustainable in the long term.
‘These are the triggers that push people over the edge into unmanageable and spiralling debt problems.’
However, financial planning expert at Quilter Heather Owen described a rate hike on Thursday as creating ‘winners’ in cash savers, who ‘are in need of a break’ after a decade of ‘rock bottom rates’,
Prospective homebuyers may also welcome a break via a slowdown in the ‘seemingly never-ending increase in house prices’, Owen explained, while future retirees considering annuities ‘could start to see better deals’.
Financial markets have already been pricing in near-term a rate hike on Thursday, so a significant impact on asset prices is unlikely.
Business activity ticked higher in October but firms are hiking prices in response to rising costs
Chief market analyst at CMC Markets UK Michael Hewson explained it will therefore be how the central bank ‘manages the message’ on future hikes that will be key.
He said: ‘The central bank will likely have to raise its outlook for inflation, while at the same time adjusting its growth forecasts as part of this week’s inflation report.’
However, while the City remains convinced of a hike this week, the BoE’s monetary policy committee is more divided on the issue than it has been for some time.
MPC rate decisions have been frequently unanimous in recent meetings, but Thursday’s decision remains on a knife edge with some members still convinced that inflation is overwhelmingly driven by temporary phenomena and others convinced a hike is necessary.
Head of investment analysis at AJ Bell Laith Khalaf explained there are ‘compelling reasons’ why the BoE may hold off this week, despite City expectations, and noted that it was only six weeks ago that the MPC voted unanimously to keep rates on hold.
‘A shift to tighter policy would be a sharp U-turn indeed,’ he said.
‘The Bank’s judgement that inflation is transitory hasn’t really been tested, as it’s only six months that CPI has been marginally above target, and in fact the inflation index fell back at the last reading.
‘The data is notoriously unreliable at the moment, thanks to the distortions created by the pandemic, and a synchronised emergence from it in Europe and America.
‘An interest rate rise in the UK isn’t going to make a blind bit of difference to the global price of oil and gas, though it will heap a bit more pressure on UK consumers at a time when many will be facing higher costs to heat their homes and travel to work’.
Khalaf also noted Chancellor Rishi Sunak’s ‘huge spending splurge’ in last week’s budget, arguing the bank ‘would be wise to take some time to properly consider what effect this may have on price rises’.
He said: ‘Given the short turnaround between the budget last week and this Thursday’s MPC meeting it seems unlikely the committee will as yet have had sufficient time to analyse the impact of the Chancellor’s policies.’
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