The Bank of England came under further pressure to hike rates at its Monetary Policy Committee meeting tomorrow, as new evidence of inflationary pressures building in the UK economy emerged.
UK businesses were more likely to increase prices in October than at any time since the record began in 1999, with a record number of businesses reporting increased 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 fuel and labor shortages and supply chain disruptions as hampering business growth.
While it also reported a sharp increase in costs, the services PMI also hit a three-month high at 59.1, down from 55.4 in September.
Cutting-edge interest rate decision looms from bank’s MPC on Thursday
But, due to the surge in prices, business optimism in the service sector has now fallen to its lowest level since January, when the UK was still stranded.
The figures bolster expectations that the Bank’s MPC will choose to raise interest rates from the current record low of 0.1% to 0.25% on Thursday, as inflationary pressure continues to be less “transient” than the bank had hoped for it.
If the bank raises rates, research from auditing, tax and advisory firm Mazars suggests UK households will face an immediate £ 900million increase in interest payments on floating rate debt, such as credit cards and variable rate mortgages.
UK households’ expectations of a rate hike have risen rapidly
Mazars associate Paul Rouse said: “UK household debt is now so large that even the most marginal increase in interest rates adds almost £ 1bn in additional costs almost overnight. the following day “
“It is important that UK households are prepared for the impact of interest rate hikes on their budgets.
“Many households have used credit cards and payday loans to manage rising energy bills and mortgage or rent payments. With the increase in interest rates, these payment methods start to become more expensive and unsustainable in the long run.
“These are the triggers that push people to the brink of unmanageable, spiraling debt problems.”
However, Quilter financial planning expert Heather Owen described a rate hike Thursday as creating “winners” in money savers, who “need a break” after a decade of “lows.” ,
Prospective buyers could also rejoice in a pause via a slowdown in “the seemingly endless rise in house prices,” Owen explained, while future retirees considering annuities “may start to see better deals.”
Financial markets have already anticipated a hike in short-term rates on Thursday, so a significant impact on asset prices is unlikely.
Business activity increased in October, but companies are raising prices in response to rising costs
CMC Markets UK chief market analyst Michael Hewson explained that it will therefore be the way the central bank “handles the message” on future hikes that will be key.
He said: “The central bank will likely have to raise its inflation outlook, while adjusting its growth forecast as part of this week’s inflation report.”
However, while the City remain 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.
Decisions on MPC rates have often been unanimous in recent meetings, but Thursday’s decision remains on a knife-edge, with some members still convinced that inflation is largely fueled by temporary phenomena and others convinced that ‘an increase is necessary.
AJ Bell’s head of investment analysis Laith Khalaf explained that there were “compelling reasons” why the BoE could suspend operations this week, despite the city’s expectations, and noted that there are At just six weeks, the MPC voted unanimously to keep rates on hold.
“A move to a stricter policy would indeed be a sharp turnaround,” he said.
“The Bank’s judgment that inflation is transient has not really been tested, as it has only been six months since the CPI was slightly above target, and in fact the inflation index has moved backwards during the last reading.
“The data is notoriously unreliable at the moment, thanks to the distortions created by the pandemic and a synchronized emergence of it in Europe and America.
‘A rise in UK interest rates will not make a blind difference to the global price of oil and gas, although it will put a little more pressure on UK consumers at a time when many will have to contend with higher costs to heat their homes and get to work ”.
Khalaf also noted Chancellor Rishi Sunak’s “huge spending folly” in last week’s budget, saying the bank “would be wise to take some time to fully assess the effect this might have on rising prices. price”.
He said: “Given the short delay between last week’s budget and Thursday’s MPC meeting, it seems unlikely that the committee still had enough time to analyze the impact of the Chancellor’s policies.”
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