UK Inflation Expected to Persist, Leading to Bank of England Tightening
“Expect a less-than-attractive figure.” Octa analysts anticipate that UK inflation will remain elevated.
Contrary to market expectations, the UK’s headline inflation rate is likely to have accelerated in September. The Bank of England may find it necessary to increase its benchmark interest rate in November. The British pound may face further depreciation if recession risks become more pronounced.
On October 18, at 6:00 am UTC, the UK Office for National Statistics (ONS) is set to release Inflation and Price indices for September.
The market anticipates a decrease in the headline Consumer Price Index (CPI) to 6.5% year-over-year (YoY) from August’s 6.7%. The core CPI is also expected to dip to 6% from 6.2% YoY. However, some analysts suggest that UK inflation figures might surpass expectations, prompting the Bank of England (BoE) to consider raising interest rates once more.
“It won’t be a favorable number,” noted an Octa analyst, referring to the forthcoming CPI release and adding, “Persistent price pressures remain. If anything, they’ve strengthened recently due to rising energy costs. Thus, an above-expectation CPI reading is certainly plausible.”
Indeed, crude oil and natural gas prices were higher in September compared to August, with Brent crude prices rising by 9%, and the UK National Balancing Point (NBP) natural gas price increasing by almost 4% in September versus August. While these key energy prices remained lower than a year ago, their monthly rise is exerting upward pressure on inflation’s underlying metrics.
The upcoming CPI report is of paramount importance, as it forms the cornerstone of the BoE’s monetary policy decisions. The previous report, released on September 20, revealed an unexpected drop in the inflation rate, sparking speculation about keeping rates on hold (after 14 increases since December 2021). However, analysts posit that this was likely an isolated incident, and inflation is set to persist.
“The prior report had a significant core inflation downturn, mostly driven by base effects. Now we see the disinflation trend slowing due to mounting fuel costs, making an inflation surprise a possibility,” remarked the Octa analyst, adding, “The BoE is likely to raise its benchmark interest rate during the November 2 meeting.”
The Bank of England faces a challenging decision. “I see the BoE caught between a rock and a hard place. It’s either high inflation or a recession. I believe they’ll opt for higher rates and accept the lesser of two evils,” said the Octa analyst.
In theory, high inflation should positively impact the exchange rate in the short term, as it increases the likelihood of higher interest rates. Consequently, if the UK CPI report reveals an inflation uptick and exceeds analysts’ forecasts, GBPUSD is likely to experience a substantial increase.
“A higher-than-expected CPI reading may propel the cable toward 1.23000. However, the rally’s duration might be limited if concerns about a recession start to dominate investor sentiment,” cautioned the Octa analyst.
Octa, an international broker, has been providing online trading services worldwide since 2011. It offers commission-free access to financial markets and various services used by clients in 180 countries, with more than 42 million trading accounts opened. Their free educational webinars, articles, and analytical tools assist clients in reaching their investment objectives. The company actively engages in a broad network of charitable and humanitarian initiatives, which include improving educational infrastructure and supporting local communities with short-notice relief projects. In the APAC region, Octa has received the ‘Best Forex Broker Malaysia 2022’ and the ‘Best Global Broker Asia 2022’ awards from Global Banking and Finance Review and International Business Magazine, respectively.