'November Prices Surge 5.1%' Will the Bank of England Hike Rates Preemptively?

[Asia Economy Reporter Park Byung-hee] As the consumer price inflation rate in the UK surged in November, there is an analysis that the Bank of England (BOE) is more likely to preemptively raise the base interest rate at its monetary policy meeting on the 16th (local time). The Federal Reserve (Fed), the US central bank, increased the pace of tightening on the 15th, which also expanded the room for the BOE to take action.

According to Bloomberg News on the 15th (local time), the UK’s consumer price inflation rate for November released that day recorded 5.1%. The inflation rate in the UK has increased significantly over the past two months. The inflation rate was 3.1% in September, jumped to 4.2% in October, and rose again by about 1 percentage point this time. The core consumer price inflation rate, excluding the highly volatile energy and food items, reached 4%, the highest since 1992. The core inflation rate also rose by 1.1 percentage points over two months from 2.9% in September.

Nomura’s Joeder Rochester, an investment strategist, said, "With inflation surging again unexpectedly, long-term inflationary pressures are increasing," and diagnosed that "the possibility of the BOE raising the base interest rate has increased."

The International Monetary Fund (IMF) advised at a video conference the day before that the UK’s inflation rate would rise to 5.5% by early next year and that there is an immediate need to raise the base interest rate.

BOE Governor Andrew Bailey strongly hinted at the possibility of a rate hike in October. Since then, investors were confident that the BOE would raise the base interest rate at the early November monetary policy meeting. However, contrary to expectations, the BOE decided to keep the base rate unchanged, sparking controversy that the BOE failed to communicate with the market at that time. At the November BOE monetary policy meeting, only 2 out of 9 members supported a rate hike. There was also an analysis that the BOE waited a bit longer to confirm the impact after the UK’s job subsidy benefits ended at the end of September. Compared to then, inflation has risen further, increasing the necessity of a rate hike.

The wage indicators released by the UK’s Office for National Statistics on the 14th also present an uncomfortable result for the BOE. The wage growth rate excluding bonuses for the three months up to October recorded 4.3%, the highest in 10 years. As wages rise, there is room for inflation to increase further. The IMF also pointed out a severe labor shortage while advising a rate hike.

Suren Thiru, an economist at the British Chamber of Commerce, said, "The inflation rate is outpacing wage growth, and we expect this situation to worsen," adding, "As a result, real household income will decrease, consumption will shrink, and overall economic activity will weaken."

However, the Omicron variant is identified as a variable.

Bloomberg analyzed that employment indicators are also improving, so the BOE is in a sufficient state to raise the base interest rate, but added the condition that this is assuming no Omicron variant. Bloomberg reported that economists and investors expect the BOE to delay the rate hike until February next year.

Michael Saunders, a monetary policy committee member who supported the rate hike at the November meeting, recently said that it might be more advantageous to wait a bit longer before raising the base interest rate.

Tom Sault, senior UK economist at Pantheon Macroeconomics, explained, "Inflation is uncomfortably high from the BOE’s perspective, but the Omicron variant requires the BOE to be more patient."

The IMF diagnosed that although the Omicron variant has increased economic uncertainty, the bigger problem is inflation.

This content was produced with the assistance of AI translation services.