Inflation expectations softer than predicted ahead of interest rate decision
Firms intend to raise prices over the next year on average at a lower rate than many economists have expected, Bank of England research has shown, easing concerns that the UK economy is heading for a deeper cost of living crisis.
The Decision Makers’ Panel, a Bank survey of how far firms plan to raise prices, broadly matched expectations made by City economists, which could ease tension in bond markets seen over recent days. Bond yields edged up on Friday after having fallen on Thursday.
A three-month average of firms’ own price expectations was below the consensus of 3.9 per cent, suggesting cost pressures may be milder than some had predicted.
The survey showed that firms plan to raise their prices by 3.6 per cent over the next year, which is still much higher than the two per cent target rate by the Bank of England.
One-year ahead CPI inflation expectations edged up slightly to 3.1 per cent though matched a prediction by economists.
Pantheon Macroeconomics analysts said the latest data release was “fractionally dovish” and could soften worries that the UK economy is heading for another spike in inflation.
“With surprises small, the bulk of Monetary Policy Committee will see the DMP as good enough to justify keeping interest rates on hold while they wait to see how the acceleration in inflation due in the second half of the year feeds through the economy,” the economist Rob Wood said.
Inflation and wage expectations edge up
Monthly figures on inflation will be crucial as it could influence Bank policymakers on whether to back interest rate hikes.
Earlier this year, two-year gilt yields jumped above 4.5 per cent, which would suggest there would be three interest rate hikes on the horizon. AJ Bell analysts noted that there could be an interest rate hike in November before two further hikes in the middle of next year.
Short-term gilt yields have since fallen slightly to around 4.4 per cent, which would still imply that interest rate hikes are set to come.
The Bank of England’s MPC still has time to monitor price pressures in the UK economy and global markets. The Brent crude oil price remains above $90 per barrel as Iran and the US continue to clash over the Strait of Hormuz, putting traders on edge that further financial tightening could come.
RBC Capital Markets said wage growth expectations data in the DMP would be crucial for the Bank of England. Yet the latest data said expected wage growth over the next year only edged up from 3.3 per cent in July to 3.4 per cent in August.