UK inflation, as measured by the consumer price index, jumped to 4.2% in annual terms in October, well above expectations of a rise to 3.9%. The Office for National Statistics, which compiles the data, said the surge to an almost 10-year high was driven by increased household energy bills, a rise in the cost of second-hand cars and fuel, as well as higher prices in restaurants and hotels.
GBP initially strengthened in the aftermath of the data, with EUR/GBP dropping below 0.8400 to its lowest level since February 2020.
Bank of England impact –
At the meeting earlier this month, the Bank of England decided to keep the Bank Rate unchanged at a record low of 0.1%, despite some strong signals that they would consider hiking rates. In testimony to MPs earlier this week, the Bank of England Governor Andrew Bailey said all meetings are “live”, suggesting that they could raise interest rates when they meet next month.
The CME’s BoEWatch tool is showing markets are pricing in 100% probability of a rate hike in December. The tool uses MPC SONIA futures prices to gauge market expectations of the future course of BoE monetary policy.
Investec Economics’ Ellie Henderson:
“With CPI inflation moving further away from the Bank of England’s 2% target, there is now even more pressure on the MPC to act to rein in price growth at its upcoming December meeting.
“Following this release, market expectations have also increased further out, pricing a 75% chance of a 25bp increase to 0.50% in February, as is our base case.”
“An extended period of above-target inflation and indications that the labour market remained strong after the furlough scheme ended means that a Bank of England interest rate rise next month remains in play.”
UK jobs market resilient despite the end of the furlough:
The number of workers on UK company payrolls has risen sharply despite the end of the government’s furlough scheme, with a record increase in people moving from unemployment into work due to the scheme’s end.
The Office for National Statistics (ONS) said Britain’s employers had added 160,000 more workers in October, taking the total to 29.3million in the first month after the wind-down of the wage subsidy scheme.
The UK unemployment rate fell by more than expected, dropping to 4.3% for the three months to the end of September, from 4.5% in August. However, the rate remains above the pre-pandemic level of 4%.
The figures come after the Bank of England declined to raise interest rates earlier this month while they waited to assess the impact of the furlough ends.
Some analysts are now seeing the employment figures as a green light for an interest rate rise before Christmas if the next jobs figures on 14th December are strong. BoE policymaker Johnathan Haskel had hinted in a speech yesterday that the labor market would be key to the bank’s next move.
Eurozone growth meets analyst expectations:
The latest eurozone GDP figures came in at expectations for the third quarter, but analysts have seen a slowdown in growth.
Pantheon Macroeconomics warned that economic growth, which accelerated in the third quarter, has started a sharp slowdown. “We look for growth of just 0.8% quarter-on-quarter in Q4, which, barring any further revisions, would mean that over the year as a whole the EZ economy expanded by 5.0% this year,” said Melanie Debono, senior Europe economist.
“The risks to our forecast are square to the downside and include ongoing supply constraints, particularly in the manufacturing sector; slow growth in China; the energy crunch and rising virus cases.”
EUR/GBP Short (Sell)
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