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'One and done' rate hints hit pound after 3% inflation

Bank of England policymakers wrong-foot traders with suggestion there may only be one interest rate rise despite rising inflation.

'One and done' rate hints hit pound after 3% inflation

(Update:) Inflation has hit a five-year high  of 3% and the question on everybody’s lips is will the Bank of England raise interest rates next month?

A reversal in the Bank's post-Brexit-vote, quarter percentage point cut in base rate looks almost certain in November, particularly after news today that the consumer price index (CPI) rose at an annual rate of 3% in September. Higher food prices and recreational goods were the main factors in the cost of living increase, said the Office for National Statistics.

Following a series of relatively hawkish comments by governor Mark Carney and other members of the monetary policy committee (MPC), the Bank had appeared poised to raise the cost of borrowing back to its previous low of 0.5%, the first hike since the 2008 financial crisis.

However, the Bank's policy makers like to keep us guessing and in prepared comments to the Treasury committee of MPs this afternoon, struck an unexpectedly dovish tone that hit the pound.

Sterling fell 0.5% to $1.3178 against the dollar as traders took the view that the MPC might embark on a 'one and done' strategy of raising rates just once rather than initiating a slow tightening of monetary policy. 

Carney made it clear that he did not think it was a good idea to  build a 'war chest' by raising rates a few times so they could be cut again in time for the next downturn.

'Inflation rising potentially above the 3% level in coming months is something that we have anticipated. As a consequence we faced a trade-off, and we still face a trade-off, between having inflation above target and the need to support, or the desirability of supporting jobs and activity.'

The Bank's new deputy governor, Dave Ramsden, distanced himself from more hawkish MPC members by saying he was not close to voting for a hike. 

‘Despite continued robust growth in employment there is no sign of second-round effects on to wages from higher recent inflation,’ he told MPs.

Also making her first policy comments to MPs was Silvana Tenreyro, a professor at the London School of Economics and external member of the MPC. She said she might vote for a rate rise as ‘we are approaching a tipping point‘ but said she was watching the economic data closely as 'rasising rates too soon would be a costly mistake'.

Nathan Sweeney, senior investment manager at Architas, agreed a rate rise was now likely next month but said the bigger question was where the Bank went to after that, given that inflation had probably now peaked and the economy was slowing down in response to Brexit.

‘We believe the ability of the Bank of England to enter a rate rising cycle is severely limited by the slowing growth we are seeing in the UK. In the face of high inflation we are still seeing little wage growth so the pressure is continuing to grow on UK households. This will make it hard for the Bank to make any sustained move to raise rates in the short to medium term,’ said Sweeney.

Viktor Nossek, director of research at WisdomTree, an exchange traded fund provider, believed the Bank could even duck a rate rise next month.

‘There has been much talk of a rate hike later this year by the Bank of England, but with so many areas of weakness in the economy, and high levels of indebtedness, a rate rise could be a step too far for the Bank of England, at least until there is more clarity on Brexit,’ he said.

Although not unexpected, the steady rise in inflation increases the pressure on consumers as the spending power of their pound wanes.

‘Consumer spending remains remarkably resilient in the face of inflationary pressures and weak wage growth, but the current squeeze on household budgets is a slow burner, as it takes some time for economic reality to hit home,’  said Laith Khalaf, senior analyst at Hargreaves Lansdown.



8 comments so far. Why not have your say?

cliff aner

Oct 17, 2017 at 13:35

Carney's job is rapidly becoming as impossible as that of May.Meanwhile Boris who got us into this mess sits on the sidelines and waffles.

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Alan Tonks

Oct 17, 2017 at 19:01

The question wouldn’t arise from my lips, because we have heard it so many times before and it never happens.

Following the normal trend of pseudo hawkish comments by Carney and his pals, the pound seesaw swings into action.

More chance of their none and done policy, after all it is the Fantasy Bank of Carney, where anything happens providing it isn’t reality.

I see the new Deputy Governor was a former helper in a chip shop, so he should know all about fishy goings on.

It really is just plain and simple manipulation and nothing more.

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an elder one

Oct 17, 2017 at 19:22

Makes you wonder if anyone can be in .control; there is seldom agreement amongst the experts;they fiddle and diddle about,. and see what comes out. The market is a compendium of the aweful "nature of human sentiment.

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an elder one

Oct 17, 2017 at 19:24

PS these touch screens are a b....r

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Oct 17, 2017 at 20:21

To Cliff Aner....A bit of inflation has always been regarded as a positive by economists, and certainly better than deflation!

As for Boris, well he just happens to share the same view as the other 17.4 million of us.

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Oct 18, 2017 at 01:11

..that pots of gold await...when we get rid of all the Muslims..

The toxic fantasy's date with reality is looming.

Never underestimate the power of large groups of stupid people.

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Mike R

Oct 21, 2017 at 10:38

The quality of thinking on Brexit , still leaves the UK miles away from guessing the final outcome . Monetary Policy and all. The pound is still looking volatile on that account. My view the UK is a loser for choosing Brexit in exchange for Sovereignty and Control !!! The Politicians have Gambled and lost for the UK or for themselves .

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Oct 21, 2017 at 10:46

JohnR. You are quite right. Look how 12.86 million voted for the Marxist led Labour Party!

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FTSE 100 hands back gains as Bank turns hawkish

by Michelle McGagh on Jun 21, 2018 at 13:09

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