The Bank of England has said that the interest rate hike it is likely to make “in the coming months” depends on whether inflation pressures continue to build and the economy moves nearer to growing at full capacity.
Most economists polled by Reuters now expect the central bank to raise rates on Nov. 2, after its next meeting, lifting the official cost of borrowing to 0.5 percent from 0.25 percent, the first increase in more than 10 years.
Below is a summary of what the BoE has said it is expecting to see in the British economy, how the economy has been performing and when the next key data releases are due.
What the BoE said: the central bank, which has a target of 2 percent inflation, said on Sept. 14 that consumer price growth will reach slightly above 3 percent in October, taking it to its highest since March 2012.
What has happened: In August the CPI rose to 2.9 percent in August from 2.6 percent in July. Many private-sector economists think it will hit 3 percent or slightly higher soon, before easing back.
The official inflation reading for September is due on Oct. 17, two weeks before the BoE’s next rates announcement, and economists polled by Reuters expect CPI to rise to 3.0 percent.
What the BoE said: In August the BoE forecast that annual wage growth would be 2.0 percent in the fourth quarter of 2017, rising to 3.0 percent in the same period of 2018.
What has happened: Wage growth during the three months to July was a bit stronger than the BoE expected at 2.1 percent year-on-year. The BoE said some of this strength was due to bonuses. Also, private-sector pay excluding bonuses measured over a shorter time frame was growing at an annualised rate of 3 percent, in line with the BoE’s expectations.
A BoE survey has shown companies plan to offer pay deals in the 2-3 percent range, while a separate survey by the Chartered Institute of Personnel and Development gave a lower 2 percent average for the private sector.
The official wage growth data for the three months to August are due to be published on Oct. 18 and economists polled by Reuters expect no change from a previous reading of 2.1 percent.
What the BoE said: Preliminary data is likely to show gross domestic product grew by 0.3 percent in the third quarter, the same slow quarterly growth as in the previous three months. But growth might be stronger due to improving consumer demand, it said.
What has happened: Financial data company Markit said its purchasing managers’ indices pointed to 0.3 percent third-quarter growth, while the National Institute of Economic and Social Research said official numbers pointed to an expansion of 0.4 percent.
August factory output beat expectations, and private-sector measures of retail sales growth have been solid. But Britain’s goods trade deficit hit a record high.
The preliminary official reading for GDP in the third quarter will be published on Oct. 25.
What the BoE said: the central bank forecast in August that unemployment would average 4.4 percent in the last three months of 2017 before rising slightly to 4.5 percent in 2018 and 2019, while labour force participation for over 16s would remain steady at 63.5 percent
What has happened: Unemployment fell faster than forecast, dropping to 4.3 percent of the workforce in the three months to July from 4.4 percent in the second quarter. That is below the 4.5 percent level that the BoE has previously said could be a trigger for higher inflation.
Labour force participation rose to 63.7 percent in June, its joint highest level since 2008.
The next official unemployment data are due on Oct. 18.
WHAT ARE FINANCIAL MARKETS SAYING?
Sterling rallied strongly in the run-up to and after the BoE’s Sept. 14 meeting, when it made its announcement, as investors had not been pricing in an interest rate rise until late 2018. Economists polled by Reuters were even more sceptical – they had expected no rate rise until 2019.
After the BoE announcement, financial markets brought forward their bets on when the rate hike would come and they are now pricing in an 85 percent chance of a hike at the Nov. 2 meeting.
Sterling peaked on Sept. 20 at $1.3656, its highest since June 2016, but has since come under pressure and is now trading at a similar level to around the Sept. 14 meeting at just under $1.33. One euro is worth about 89 pence.
Source: Reuters (Editing by WilliamSchomberg/Jeremy Gaunt/Alexander Smith)