Further pressure on the Bank of England to raise interest rates


The Bank of England is under mounting pressure to increase interest rates next month after inflation rose to the highest level in a decade in October amid the squeeze on living standards from soaring household energy bills.

A sharp increase in gas and electricity prices pushed inflation, as measured by the consumer prices index, to 4.2% in October, up from 3.1% in September, according to the Office for National Statistics – the highest rate since November 2011.

In a sign of the rising pressure on household budgets before what could be a difficult winter, the figure was higher than was forecast by City economists, and more than double the 2% target set by the government for the Bank of England. It comes after the energy regulator Ofgem lifted its consumer price cap after wholesale gas prices soared to record levels as economies around the world emerged from lockdown and supplies of Russian gas to Europe failed to meet demand.

And economists expect further inflationary pressures in the coming months after the German government suspended its approval process for the Nord Stream 2 gas pipeline, triggering an increase in wholesale energy prices. The jump in the annual inflation rate was also driven by higher prices in restaurants and hotels after a partial removal of a VAT cut for the hospitality sector, as well as soaring prices for second-hand cars.

Much of the increase reflected depressed price levels a year ago as the coronavirus pandemic dragged down economic activity around the world, including the worst recession in Britain for 300 years. Threadneedle Street unexpectedly held back from raising rates this month, confounding financial market expectations.

The Bank forecasts inflation will peak at close to 5% next year, in what it predicts will be a temporary increase, before gradually fading back towards its 2% target as disruption caused by the pandemic recedes. Economists said the higher inflation rate and robust employment figures published on 16th November would give the green light for a rise in interest rates in December from the current level of 0.1%, most likely to 0.25%.

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Sources: Techlink


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