UK inflation surprise pressures BoE to raise rates again

According to official data, British inflation unexpectedly rose to 10.4% in February, which is likely to prompt the Bank of England to increase interest rates on Thursday. Economists polled by Reuters had earlier forecast that the annual consumer price inflation rate would drop to 9.9% in February from January’s 10.1%. However, with the increase in inflation measures that the BoE closely monitors for, it is likely to bolster the concerns of those BoE policymakers who worry that inflation will be slow to fall, even after 10 straight rate hikes.

Investors had been unsure whether the central bank would pause after the recent unrest in the global banking sector. Despite the uncertainty, financial markets have fully priced in the quarter-point increase to 4.25% for the interest rates. The senior economist at HSBC, Liz Martins, said that “this inflation outturn would appear to swing it in favour of a 25-basis-point hike.”

The data revealed that price increases in food and drinks in pubs and restaurants were the biggest contributors to the inflation rate increase in February. The ONS also reported an end to January drinks promotions in pubs and restaurants as the largest factor behind the rise. An overall inflation for food and non-alcoholic drinks rose to 18.0%, the highest since 1977, reflecting cold weather in Southern Europe and North Africa.

Furthermore, the annual inflation in the service sector, which is considered by most policymakers to be a good measure of underlying price pressures in the economy, rose to 6.6% from 6.0% in January.

Last month, the BoE had forecast headline inflation would drop below 4% by the end of 2023 and be beneath its 2% target from mid-2024 onwards, with energy prices no longer rising steeply. The government’s Office for Budget Responsibility forecast last week that inflation would fall below 3% by the end of 2023.

Finance minister Jeremy Hunt said that the data showed the expected decline in inflation could not be taken for granted, and it wasn’t inevitable, so the government must stick to its plan to halve it this year.

Overall, this increase in inflation may prompt the BoE to raise interest rates for the eleventh consecutive time, despite debates on whether the central bank should pause the run after recent global banking upheaval.

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