Rising oil prices could upset Bank of England policy, despite the latest inflation figures unexpectedly stalling at 3 per cent in today’s ONS figures.
Political tension in the Middle East has seen oil prices soar past $60 a barrel this month as Saudi Arabia Crown Prince Mohammed bin Salman unexpectedly arrested a number of princes and government ministers on corruption charges.
That resulting hit to the oil price, which is also being supported by potential supply cuts from Opec and Russia, would feed through into upcoming inflation figures as the impact of Brexit sterling depreciation starts to slow.
The October inflation figure came in slightly below the consensus figure of 3.1 per cent, at which point Bank of England governor Mark Carney would be required to write to Chancellor Philip Hammond explaining why inflation has overshot its target.
Carney told the Treasury select committee last month that he expected sterling depreciation to feed through into inflation for three years after the fall triggered by the UK’s vote to leave the European Union.
Sterling weakened this week as reports surfaced of a leadership challenge within the Conservative Party. The sterling outlook has a 30 per cent range depending on Brexit outcomes, according to RLAM head of multi asset Trevor Greetham.
Schroders senior economist Azad Zangana says a rise in global oil prices could slow the fall in inflation and is likely to squeeze households further, keeping UK GDP growth subdued.
AJ Bell investment director Russ Mould says the Bank of England may now be more concerned about oil prices than sterling depreciation, with Brent crude a significant contributor to inflation.
“Riyadh, Moscow, Texas and Tehran are the key power brokers here, not Threadneedle Street, London,” Mould says.
He warns that if the price of oil remains above $60 a barrel the Bank of England could be forced to tighten monetary policy “more than it would like” ahead of the Brexit deadline in March 2019.
The market is currently pricing in one more rate rise in the next 12 months.
The Share Centre chief executive Richard Stone says personal investors will now be turning their attention to next week’s budget.
Stone says the Chancellor should focus on addressing the productivity challenge through investment in technology, education and training.