The market probability of a further 25 basis point increase at the Monetary Policy Committee’s next meeting is at 73%, according to Refinitiv data. The U.K. annual inflation rate dipped for a third straight month to 10.1% in January, landing below consensus forecasts, even as high food and energy prices continue to squeeze British households. Tuesday’s employment figures for December offered little indication that the labor market is beginning to ease.
Economists believe that the Bank of England is likely to press ahead with a further interest rate hike in March, due to a tight labor market and comparatively slow return to earth for inflation. The market probability of a further 25 basis point increase at the Monetary Policy Committee’s next meeting nudged up past 73% on Wednesday before sliding back to around 66% by Thursday morning, according to Refinitiv data.
The U.K.’s annual inflation rate dipped below 10% in January for the first time in three months, landing below consensus forecasts. Although inflation is slowly coming down, the rate of price increases fell by just 1% between October and January — marking a comparatively small decline compared to those seen in other major economies. This could be bad news for British households who are still feeling the squeeze from high food and energy prices.
Richard Carter, head of fixed interest research at Quilter Cheviot, said that investors will be somewhat comforted by the direction of travel for prices, with the FTSE 100 recently reaching record highs. However, food prices remain a major driver of U.K. inflation, continuing their upwards march in January with an eye-watering 16.8% increase. Food industry bosses have warned that prices will take considerable time to come down.
Tuesday’s employment figures for December offered little indication that the labor market is beginning to ease, with unemployment remaining at 3.7%. Growth in average weekly earnings excluding bonuses increased to an 18-month high 6.7% during the final three months of 2022.
Along with the supply-side shortfall, the U.K. is navigating widespread industrial action among public sector workers, as pay increases continue to lag behind inflation. This has resulted in a squeeze on disposable incomes and a decline in consumer spending, which is likely to weigh on overall economic growth in the near term.
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