Markets pencil in UK interest rate rise in days before Christmas

Forecasts of early increase come as series of indicators show strains on industry and big fall in consumer confidence

Traders are betting that Bank of England policymakers are likely to begin raising interest rates as early as December in response to fuel and food shortages that are expected to push up inflation before Christmas.

Financial markets have brought forward their forecasts for interest rate rises, judging a 0.15% increase in the central bank’s base rate a certainty in the days before Christmas. The increase is in addition to two 0.25% rises earmarked for next February and August that will push borrowing rates by the end of 2022 back to the 0.75% level seen before the pandemic.

Forecasts of an early increase came after a flurry of indicators showed the strain on UK industry as shortages of imports has resulted in higher costs for basic raw materials and vital components.

Interest rate graphic

Consumer confidence has also been shaken, with two separate surveys pointing to a sharp decline in September, reversing a recovery during the spring and summer.

The retail consultancy IGD said its shopper confidence index recorded its largest monthly decline last month, taking it to its lowest level in a year.

“Concern around food price inflation has now reached its highest level since March 2013,” the consultancy said after 85% of shoppers said they expected food and grocery prices to get more expensive in the year ahead, up from 79% in August.

Barclaycard said 90% of the shoppers it surveyed were concerned that the rising cost of everyday items would have a negative impact on their household finances.

A survey of retailers last month found sales growth fell to the lowest level since the lockdown in January, as shoppers were confronted by queues at petrol stations, rising prices and empty shelves in the shops.

Consumers, many of whom had begun to venture back to the high street, delayed or abandoned planned purchases either because local petrol stations had run out of fuel or the cost of goods had soared, eating into disposable incomes.

The British Retail Consortium said shops that sold expensive items such as furniture and homewares were among the worst affected, adding that declining levels of consumer confidence could persist into the festive season without action from the government.

Bank of England officials have become concerned that what was seen as a temporary rise in inflation earlier this year was steadily becoming entrenched.

At the last meeting of the Bank’s monetary policy committee (MPC), the nine-strong group kept interest rates on hold.

In a speech shortly after the meeting in September, the Bank’s governor, Andrew Bailey, emphasised “the hard yards” the UK economy must travel before it regained the same level of activity and income achieved before the pandemic, signalling that rate rises planned for next year may be delayed.

However, Bailey said in an interview with the Yorkshire Post on Saturday that he was concerned about inflation and uneasy about consumers beginning to see the rise in inflation as a permanent feature.

His fellow MPC member Michael Saunders told the Sunday Telegraph it was appropriate for financial markets to expect an early rate rise in December based on the current data.

The pair’s interventions are likely to fuel concerns that the MPC is giving the market a confused message about the path of interest rates.

Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, said: “We think markets are jumping the gun in how quickly the MPC will hike rates.”

Speaking at an Institute for Fiscal Studies (IFS) event, Christian Shultz, a Citi bank economist, said he expected rate increase to be delayed while the UK economy struggled to cope with the rising cost of fuel and shortages of basic goods.

The UK has also yet to discover how many of the 1 million people on furlough when the scheme closed last month have managed to find work with their employer or found another job.

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A rise in unemployment before the end of the year would probably persuade the MPC that a rate rise would make the economic situation worse. But should the Bank press ahead in December, it would pose a headache for the chancellor, Rishi Sunak, because Threadneedle Street holds about one-third of all government debt, and a rat rise would increase the financing cost to the Treasury.

According to the IFS, each additional 1% on the Bank’s base rate adds £10bn to annual debt interest spending.

Helen Dickinson, the BRC’s chief executive, said the problems with shortages were far from over and called on the government to make further efforts to intervene.

She said: “Retailers, farmers and manufacturers are already making preparations to ensure enough food and festive gifts move through the supply chain in time for Christmas.

“Unfortunately, the lack of drivers is hindering these preparations and increasing costs, which will eventually be reflected in higher prices.”

Contributor

Phillip Inman

The GuardianTramp

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