Will interest rates rise next year?

Inflation is rising, employment is rising, wages are rising. Does that mean interest rates will rise too?

773-inflation

Inflation has edged back above zero. The annual increase in the consumer price index (CPI) climbed to 0.1% in November, from -0.1% the month before. Underlying inflation, stripping out volatile food and energy costs, ticked up to 1.2%. Meanwhile, employment rose further in the three months to September, taking the employment rate to a record high of 73.9%, and lowering the unemployment rate to another post-crisis low of 5.2%. The pre-crisis low was 4.7%, reached in 2005. But the claimant count measure of unemployment ticked up, and annual pay growth eased to 2.4% in October, from 3% in September.

What the commentators said

But perhaps not as long as the market thinks, said Capital Economics: its forward projections of interest rates imply no movement from the Bank until 2017. But overall inflation, even if oil prices stay stable at $40, would be back above 1% by next September as the much bigger falls of 2014 passes out of the annual comparison. Imported goods price inflation should climb too as the impact of sterling's recent strength ebbs. Meanwhile, there are signs that productivity is finally beginning to rise, which implies higher pay.

The weekly wage growth data is stronger than it looks, according to Pantheon Macroeconomics. It has been skewed of late by a slight dip in average weekly hours worked to 32. The Centre for Economics and Business Research, moreover, thinks the national living-wage policy could soon push earningsgrowth back up to an annual 3%.That in turn is set to fuel a 3% real increase in inflation-adjusted household spending, the key driver of growth. So the hawks at the bank "could soon have something to get their teeth into", said FT.com. The upshot? Capital Economics and Pantheon Macroeconomics are both pencilling in the first rate rise for the second quarter of 2016.

Recommended

Greensill, Cameron and the return of Tory sleaze
UK Economy

Greensill, Cameron and the return of Tory sleaze

The collapse of Greensill Capital threw a spotlight on political lobbying when it emerged that former PM David Cameron had been fighting its corner. J…
17 Apr 2021
Recovery Loan Scheme: the latest government aid package for small businesses
Small business

Recovery Loan Scheme: the latest government aid package for small businesses

The Recovery Loan Scheme will help companies weather the pandemic
16 Apr 2021
UK mid-cap stocks look forward to life after lockdown
UK stockmarkets

UK mid-cap stocks look forward to life after lockdown

The FTSE 250 hit an all-time high at the end of last week, as investors look to a post-lockdown recovery.
16 Apr 2021
House prices: from boom to even bigger boom
House prices

House prices: from boom to even bigger boom

UK house prices have risen to new to record highs, says Nicole Garcia Merida. Demand continues to outpace supply, but continued low interest rates, th…
9 Apr 2021

Most Popular

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
The FTSE 100 has clawed back above 7,000 – how much higher can it go?
UK stockmarkets

The FTSE 100 has clawed back above 7,000 – how much higher can it go?

The FTSE 100 index has risen to over 7,000 for the first time in over a year – it now sits just above where it was in 1999. But its era of neglect cou…
19 Apr 2021
The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021