End-of-year rate hike in balance as Bank of England faces economic dilemma

The likelihood of a hike in interest rates before the end of the year hangs in the balance as Bank of England policymakers weigh up increasing inflationary pressures against lacklustre growth.

Bank of England rate-setters are due to gather this week for one of their eight 2021 meetings.

Economists said this week’s meeting of the central bank’s monetary policy committee would take place at a “potentially awkward moment for the UK economy”.

Official statistics last week showed inflation had leapt to its highest level for almost a decade after a record jump in August, heaping fresh pressure on household budgets and businesses and stoking fears of higher borrowing costs.

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The Office for National Statistics (ONS) said the consumer prices index (CPI) measure of inflation jumped from an annual rate of 2 per cent in July to 3.2 per cent last month - the highest level since March 2012.

On the economic front, figures released on Friday showed that UK retail takings fell in August for the fourth consecutive month as grocery sales were impacted by more people returning to restaurants and pubs.

The drop in sales for last month came as a surprise to analysts, who had forecast a modest increase for the month. It marked the first time since 1996 that retail sales have dropped for four months in a row.

Luke Bartholomew, senior economist at Aberdeen Standard Investments, said: “The Bank of England’s meeting comes at a potentially awkward moment for the UK economy. With growing evidence that inflationary pressures are mounting at the same time that growth is slowing, the Bank may be facing a trade-off over which factors it prioritises.

“Speculation is mounting that the Bank will start to increase interest rates next year. We think the current bout of higher inflation will prove to be transitory and that unemployment may increase around the end of furlough which could stay the Bank’s hand.

“But the Bank will need to signal to markets quickly if it thinks current hiking speculation has gone too far, otherwise it risks these predictions having a certain self-fulfilling logic.

“The other interesting thing to watch out for will be how the new members of the Bank’s decision making body – Catherine Mann and newly appointed chief economist Huw Pill – use their votes.”

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