Inflation jump risks 6-3 split for Bank of England rate decision

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A return to rising UK inflation risks a 6-3 split on at this week’s Bank of England monetary policy committee decision on interest rates.

ONS figures released today show the headline rate of inflation jumping to 2.9 per cent from 2.6 per cent in July. While August is a typically high inflation month due to air travel and holidays, it was clothing and footwear costs that led the increased rate, rising a record 4.6 per cent.

Share Centre chief executive Richard Stone says today’s data release makes the interest rate decision more finely balanced. “We can see this month inflation pressures coming from areas such as clothing not from typically dollar-priced commodities such as oil.”

M&G UK Inflation Linked Corporate Bond fund manager Ben Lord says MPC disagreement will lead to some sterling strength.

The risks of a 6-3 vote at the next monetary policy meeting have risen materially on the back of this number, as Andy Haldane has been pretty explicit on his discomfort with present levels of inflation, even if they are due to currency weakness and imports.”

However, Lord questions the rationale in reacting to inflation as it approaches its peak in the next month or so.

Those expecting inflation to fall back from here are pricing the first hike to come in the middle of 2018 and the second hike to come at some point in the second half of 2019,” Lord says.

“If inflation doesn’t fall back for whatever reason – the most likely reason would be sterling weakness on account of Brexit debates – then the need to start bringing forward rate hikes and increasing their number intensifies.”

If inflation reaches 3 per cent governor Mark Carney will be required to write to Chancellor Phillip Hammond explaining why the rate has diverged so far from the 2 per cent target.

Prudential Portfolio Management Group senior economist Leila Butt says worries about high inflation combined with spare capacity in the economy may lead to more members voting for a rate hike, but she still expects a majority of members to keep rates on hold for the remainder of the year.