December 25, 2024

Customers buy flowers from stalls at the Columbia Road Flower Market in East London.

Henry Nichols | AFP | Getty Images

LONDON – UK inflation rose sharply to a higher-than-expected 2.3% in October, data from the Office for National Statistics showed on Wednesday, undermining expectations the Bank of England will cut interest rates in December.

The rate hike was a sharp increase from September’s 1.7% rate and exceeded the 2.2% forecast by economists polled by Reuters.

The latest report once again puts inflation above the Bank of England’s 2% target, which could dampen prospects for an eventual rate cut this year.

Sterling rose slightly after the latest inflation data, rising 0.1% to $1.2692 at 8:03 am London time. Sterling rose 0.4% against the euro to €1.20.

Core inflation (excluding energy, food, alcohol and tobacco) was 3.3% this month, slightly higher than September’s 3.2%.

The expected rise is partly due to regulators setting energy prices that are only effective until October, which is expected to lead to higher energy price inflation during the cold winter months.

Price growth in Britain’s dominant services sector edged up to 5.0% from 4.9% in September, hitting the lowest level in more than two years.

“With rising energy bills, budget impacts and global trade frictions, inflation should gradually move higher, with headline rates likely to hover above the Bank of England’s 2% target until 2025,” England and Wales Institute of Chartered Accountants.

Interest rates take center stage

The data will be factored into the Bank of England’s upcoming interest rate decision on December 19, although a further inflation report will be released before the meeting.

central bank It cut interest rates by 25 basis points earlier this month, but said future rate cuts would be “gradual” as the economic outlook faces new challenges.

As of Wednesday morning, markets were pricing in just a 14% chance of a further 25 basis point rate cut this year.

Lindsay James, investment strategist at Quilter Investors, said Wednesday’s inflation data made it “increasingly likely” that the Bank of England would leave interest rates unchanged at the end of the year.

“This is a stark reminder that short-term inflationary pulses could return, possibly caused by factors such as trade barriers, labor market tightness, taxes and volatile food and energy prices,” James said.

“Whether October’s rise in inflation was just a blip remains to be seen, but with more inflationary risks on the horizon, the central bank is likely to take a cautious approach in the coming months,” she added.

British borrowing costs rose slightly on Wednesday, with the 10-year government bond yield at 4.491%.

Clouds of uncertainty have been hanging over Britain in recent months, with the Labor government accused of belittling the economy and delaying a fiscal agenda after the July 4 election.

UK Finance Minister Rachel Reeves unveiled her autumn budget on October 30, announcing a £40 billion ($51.8 billion) tax increase to plug what she called a “black hole” in public finances and change UK debt rules to facilitate further public spending.

Commentators, including the government-funded but politically neutral Office for Budget Responsibility, have warned the measures could push up inflation while boosting Britain’s near-term growth prospects.

Globally, the prospect of incoming U.S. President Donald Trump imposing trade tariffs has raised concerns about further inflationary pressures in 2025.

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