Markets are drawing rate hikes in Great Britain in the days leading up to Christmas | interest charges
Traders are betting that Bank of England policymakers are likely to start raising rates as early as December in response to fuel and food shortages, which are expected to boost inflation before Christmas.
The financial markets have brought forward their rate hike forecasts and believe that the central bank’s key interest rate will rise by 0.15% in the days leading up to Christmas. The increase comes in addition to two increases of 0.25% planned for February and August, which will push lending rates back to the pre-pandemic level of 0.75% by the end of 2022.
The predictions for an early increase came after a flood of indicators showed the strain on UK industry as import scarcity resulted in higher costs for basic raw materials and vital components.
Interest rate graph
Consumer confidence was also shaken, with two separate polls pointing to a sharp fall in September, undoing a spring and summer rebound.
Retail consultancy IGD announced that its buyer confidence index saw its largest monthly decline last month, climbing to its lowest level in a year.
“Concerns about food price inflation are now at their highest level since March 2013,” the consultancy said after 85% of shoppers said they expected food and grocery prices to become more expensive in the coming year, up from 79% in August.
Barclaycard said 90% of shoppers surveyed were concerned that the rising cost of everyday items would negatively affect their household finances.
A survey of retailers last month found that sales growth has dropped to its lowest level since the January lockdown as shoppers faced gas station queues, rising prices and empty shelves in stores.
Consumers, many of whom had begun to venture back onto the main drag, delayed or gave up planned purchases, either because local gas stations had run out of fuel or because commodity prices had skyrocketed, consuming their disposable income.
The British Retail Consortium said stores selling expensive items like furniture and housewares were hardest hit, adding that without government action, falling consumer confidence could continue into the Christmas season.
Bank of England officials are concerned that what was seen as a temporary spike in inflation earlier this year is becoming more and more entrenched.
At the last meeting of the bank’s Monetary Policy Committee (MPC), the group of nine kept rates unchanged.
In a speech shortly after the September session, the Bank’s Governor Andrew Bailey highlighted “the tough yards” the UK economy will have to go before it regains the same levels of activity and income as it did before the pandemic year may be delayed.
However, in an interview with the Yorkshire Post on Saturday, Bailey said he was concerned about inflation and worried that consumers are seeing the rise in inflation as a permanent feature.
His MPC colleague Michael Saunders told the Sunday Telegraph that it was fair for financial markets to expect an early rate hike in December based on current data.
The pair’s interventions are likely to raise concerns that the MPC is delivering confused news to the market about interest rate developments.
Samuel Tombs, UK chief economist at Pantheon Macroeconomics, said, “We believe the markets will overtake how quickly the MPC will raise rates.”
Speaking at an event hosted by the Institute for Fiscal Studies (IFS), Christian Shultz, an economist with Citi bank, said he expected the rate hike to be delayed as the UK economy grappled with rising fuel costs and shortages of basic goods.
The UK also has yet to find out how many of the 1 million people who were on vacation when the program completed last month managed to find work with their employer or find another job.
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An increase in unemployment before the end of the year would likely convince the MPC that an interest rate hike would worsen the economic situation. But should the bank move forward in December, it would be a headache for Chancellor Rishi Sunak, as Threadneedle Street holds about a third of all national debt, and a rate hike would increase funding costs for the Treasury Department.
According to the IFS, every additional 1% of the bank’s base rate increases annual debt interest expenditure by £ 10 billion.
Helen Dickinson, the executive director of the BRC, said the problems with the bottlenecks were far from over and urged the government to make further efforts to intervene.
She said: “Retailers, farmers and manufacturers are already preparing to ensure that enough food and festive gifts get through the supply chain in time for Christmas.
“Unfortunately, the lack of drivers hinders these preparations and increases costs, which will ultimately be reflected in higher prices.”