Interest rate cut hopes were crushed yesterday after a bigger-than-expected rise in inflation to a six-month high – in a blow to millions of borrowers.
The Office for National Statistics (ONS) said inflation climbed to 2.3 per cent in October, its highest level since April – and up from 1.7 per cent the month before.
It is the latest blow to Labour’s stuttering economic performance so far and comes after figures last week showed growth had slowed to a crawl in the party’s first three months in power.
Tory shadow chancellor Mel Stride said: ‘It’s higher inflation and lower growth under Labour.’
Higher inflation will add to the Bank of England’s reluctance to cut its benchmark rate, currently at 4.75 per cent.
Chancellor Rachel Reeves announced a tax bomb budget last month
It has so far been cut twice this year but the Bank insists it will take a ‘gradual’ approach to further moves amid fears that inflation pressures could reemerge.
Financial markets now see a less than one in six chance of a cut in December and a little more than 50/50 chance of a reduction at the Bank’s subsequent meeting in February.
It means borrowers could be waiting until March to see any further relief.
Rachel Reeves’s Budget has also dented rate cut hopes – as the Bank judges that the Chancellor’s spending plans will drive a further increase in inflation.
The Bank is also waiting to see how much of an impact Labour’s £25 billion national insurance raid will have in pushing up prices, lowering wage growth and reducing employment.
And Donald Trump’s election victory has added to the uncertainty – as his threat to impose swingeing tariffs on imports threatens to spark a global trade war.
Anna Leach, chief economist at the Institute of Directors, said the ‘painful Budget for business’ was adding to inflationary pressures.
‘Inflation is now set to be higher for longer as firms pass through the impact of higher costs into higher prices, and as higher public spending over the next couple of years further generates inflationary pressures,’ she added.
‘Interest rates are likely to come down more slowly, adding to financing costs for both households and businesses, constraining consumption and investment.
‘Unfortunately, while the recent Budget stabilised the public finances, it has undermined growth in the private sector, shattering business confidence and renewing inflationary pressures’.
David Hollingworth, associate director at L&C Mortgages, a broker, said the inflation figures would ‘harden’ the view that the Bank of England interest rate will fall only slowly.
Rachel Reeves’s Budget has also dented rate cut hopes – as the Bank judges that the Chancellor’s spending plans will drive a further increase in inflation
Donald Trump’s election victory has added to the economic uncertainty – as his threat to impose swingeing tariffs on imports threatens to spark a global trade war
That will feed into the rates offered by lenders on fixed rate mortgage deals – which are linked to the expected path of Bank rate rather than its current level, and represent the majority of home loans.
‘Borrowers will therefore need to remain on their toes, as mortgage deals are still in something of a state of flux and lenders are repricing regularly,’ Mr Hollingworth said.
‘It would be of little surprise if that trend continues and fixed rates are pushed higher on the back of today’s news.
‘Yesterday’s figures from the Office for National Statistics (ONS) showed inflation was slightly higher than the 2.2 per cent figure that was expected.
It was largely the result of a 10 per cent rise in the energy price cap from the start of October.
The cap, set by regulator Ofgem lifted typical annual energy bills by £149 to £1,717.Underlying inflation measures stripping out volatile food and energy costs were also worse than feared.
Inflation has fallen sharply from its peak two years ago when it hit 11.1 per cent amid a surge in gas and electricity prices following Russia’s invasion of Ukraine.
But the ONS figures showed that households are still feeling the effects, with gas prices 88 per cent higher and electricity 56 per cent higher than they were in March 2021. And there is little sign of any relief coming soon.
The price cap from January, set to be announced tomorrow (FRIDAY), is expected to see bills go up by a further £19.
The Bank of England expects inflation will continue to climb over coming months, heading close to 3 per cent by the second half of next year. The Bank targets an inflation rate of 2 per cent.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: ‘This month’s unwelcome return above the inflation target is unlikely to be a one-off: inflationary pressures look set to keep prices rising more quickly.
‘November’s interest rate cut might have raised expectations that more cuts could be on the way, but inflation looks set to get in the way again.
‘Darren Jones, chief secretary to the Treasury, said: ‘We know that families across Britain are still struggling with the cost of living.
‘The Government is focused on economic growth and investment so we can make every part of the country better off.’
However, a glimmer of hope was offered to borrowers yesterday by Dave Ramsden, a member of the Bank’s rate-setting Monetary Policy Committee.
Mr Ramsden said inflation could easily come in lower than the Bank is predicting, which would mean ‘less gradual’ rate cuts.
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