UK markets closed
  • FTSE 100

    -46.15 (-0.61%)
  • FTSE 250

    -229.50 (-1.19%)
  • AIM

    -10.53 (-1.24%)

    +0.0012 (+0.11%)

    +0.0004 (+0.04%)

    -101.03 (-0.72%)
  • CMC Crypto 200

    -0.76 (-0.19%)
  • S&P 500

    -45.91 (-1.15%)
  • DOW

    -272.15 (-0.80%)

    -2.14 (-2.78%)

    +3.20 (+0.18%)
  • NIKKEI 225

    +65.47 (+0.24%)

    -77.11 (-0.40%)
  • DAX

    -104.42 (-0.72%)
  • CAC 40

    -9.17 (-0.14%)

Interest rates: Inflation data makes another steep rise by Bank of England more likely

The Bank of England is expected to aggressively raise interest rates on 22 September. Photo: Peter Dazeley/Getty
The Bank of England is expected to aggressively raise interest rates on 22 September. Photo: Peter Dazeley/Getty

Markets are betting on the Bank of England to raise interest rates by another 50 basis points – or even 75 – when it meets next week.

While Britain's rate of inflation eased last month after registering a double digit increase for the first time in more than four decades in July, core prices continued to rise.

Consumer price index (CPI) inflation unexpectedly fell to 9.9% in the 12 months to August from 10.1% the month before, according to the Office for National Statistics (ONS) on Wednesday.

Fuel prices were the largest contributor to the downward move while food costs were the biggest driver of inflation last month.

Wednesday's reading marked the first time that the inflation rate has fallen since September last year.

But core prices, which exclude volatile items like energy and food, ticked up to 6.3% from 6.2%, suggesting price rises are firmly embedded across the economy.

Read more: UK inflation unexpectedly falls to 9.9% as fuel prices ease

Russ Mould, investment director at AJ Bell, said: "The probability data and forward curve of market expectations for Bank of England (BoE) interest rates changes by the second.

"Right now the market is pricing in a 12% chance of a 0.50% rise and 88% chance of a 0.75% advance next week."

He also noted that this could be due to Tuesday's worse-than-expected US inflation print and the UK’s data, as it "seemed to push back the hoped-for Powell Pause or Powell Pivot".

A 50 or 75bp hike will take the key rate to 2.25% or 2.50% respectively from the current 1.75%.

Read more: UK economy grows slower than expected as higher prices hit growth

Despite inflation running at nearly five times of its 2% target, Threadneedle Street's monetary policy committee has to balance its tightening policy as recession looms.

According to Michael Hewson, chief market analyst at CMC Markets, the Bank could be pushed to hike rates by 75bp by a more hawkish Federal Reserve and to support a weakening pound.

Jerome Powell and the Federal Open Market Committee are expected to pursue an aggressive path as US CPI rose 8.3% in August from the same month a year ago.

Hewson told Yahoo Finance UK: "The rise in core prices could be more of a concern for the Bank of England given that they edged higher to 6.3%, which could shift their focus to be more aggressive in the short term, if only to match the Fed and help to underpin the pound.

"Further sterling weakness against the backdrop of a more aggressive Fed could force a move by 75bps and would also give them the added flexibility to go slower heading into year end."

Sterling (GBPUSD=X) has been one of the worst performing major currencies this year as investors’ fears about inflation, the economic outlook, and political uncertainty weigh.

The Bank will also likely weigh the impact of inflation on Britain's economy, which expanded less-than-expected in July as price rises continue to darken the outlook.

Gross domestic product (GDP) grew 0.2% in the month following a 0.6% slump in June, when activity was hit by the extra bank holiday to mark the Queen's Platinum Jubilee.

And analysts have warned that another additional public holiday for the Queen's funeral on 19 September could tip the UK economy into recession as the nation grinds to a halt to mourn the monarch.

The Bank of England's monetary policy decision will take place on Thursday 22 September after it was postponed by a week due to the death of Queen Elizabeth.

Watch: How does inflation affect interest rates?