The Bank of England will make a call at noon today on interest rates – with the City split on whether surprise inflation data gives Threadneedle Street cover to pause its rate hike cycle.
The Federal Reserve chose again to hold rates last night, though the body behind the decision warned they were still alive to “signifcant” inflationary pressures.
The City had priced in at least one more interest rate rise this side of the pond, however surprise inflation data released yesterday has complicated matters.
Over the past few weeks rate-setters have pointed to a few key indicators which will influence their decision, many of which seem to be moving in the right direction — albeit slowly.
In yesterday’s data, services inflation fell to 6.8 per cent from 7.4 per cent last month. The Bank has highlighted services because it argues it is a good measure of how embedded inflation has become in the economy.
Chris Hare, senior economist at HSBC, said the data was a “major curveball” for the Bank of England.
He still expected rates to be lifted by 25 basis points tomorrow, but said the data “raises a risk” that the MPC will refrain from lifting rates any higher after that.
But Jari Stehn, chief Europe economist at Goldman Sachs, went further, arguing that August’s downside surprise means the MPC will “keep [the] Bank Rate unchanged tomorrow”.
“While the level of underlying inflation remains high, two out of the MPC’s three persistence criteria have now weakened more than expected since the August meeting,” he said.
A pause would be met with relief by many business groups, who have been warning that further rate hikes would pour pressure onto businesses and tip the economy into a needless recession.
Kitty Ussher, chief economist at the Institute of Directors, said yesterday’s figures support the view that rate hikes “should be given more time to work” before the Bank decides whether the bank rate “needs to rise further”.