Bank: Rate increase likely in “coming months” if inflation jumps

The Bank of England has interest rates kept on hold – but warned that if inflation continues to grow, a rise is “likely” in the “coming months.”

Minutes of the latest monetary policy committee (MPC) meeting showed a 7-2 vote in favour of no change this September- keeping rates at a post-Brexit low of 0.25%.

It was being watched closely as the decision was made days after the Office for National Statistics reported a leap in the inflation consumer price to 2.9% in August from July’s annual rate of 2.6%.

Cost of fashion drives inflation to 2.9%

With inflation above its 2% target, the Bank has been growing increasingly cautious regarding the threat posed to the economy by higher prices.

The MPC minutes, however, also strengthened expectations of a possible rise in interest rates by announcing that it would depend not only on inflation growing further but also the economy sustaining its recent strength.

Other data from this week pointed to the weakest jobless rate since 1975 even though wage growth persisted to be stubbornly slow at 2.1%.

If the inflation figure of 2.9% is taken into account, it suggests that the squeeze on family budgets is increasing.

Prices have increased because costs of import were raised by the post-Brexit vote collapse in the value of sterling.

After the rate deliberations of MPC came to light, the currency gained more than a cent versus the dollar – back above $1.3350 to fresh one-year highs.

Leaving the pound on track for its best week against the single currency in 10 months, it also recovered against the euro, trading back below the €0.89 mark.

The variations hit the market values of multinationals, especially the dollar-earners, on the FTSE 100 which was 1% lower in early afternoon trading at 7306 points.

The MPC, in signalling an increasing lack of tolerance for rising prices, stated: ” A majority of MPC members judge that, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target.

“All members agree that any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.”

The senior economist at Hargreaves Lansdown, Ben Brettell, responded: “To me, leaving rates where they are makes a great deal of sense.

“Throw a hefty dose of Brexit-related uncertainty into the mix and it’s easy to see why the majority of policymakers see higher rates as an unjustified risk at this stage.”