Bailey clears the way for a Christmas rate hike as inflation soars

A rate rise before Christmas could be in the advent calendar after strong jobs data today suggested the UK economy is robust enought to handle higher borrowing costs.

The number of UK workers on company payrolls surged by 160,000 last month and there was no sign of a jump in redundancies despite the furlough support scheme coming to an end, according to official figures.

With the consumer prices index tomorrow expected to show inflation of about 3.9 per cent for October, many analysts believe a rate rise is now nailed on at the December 16 meeting.

Mike Owens, Global Sales Trader at Saxo Markets, said: ‘If a strong jobs report was what the Bank of England was looking for before raising interest rates, it has officially received the green light for December.’

Rate hike: Analysts believe inflation will come in at 3.9% for October, above the 3.1% recorded in September, and far outstripping the Bank of England’s 2% target 

He added that the currency markets agreed, with sterling reacted positively to the news, ‘with all eyes now firmly fixed on the inflation report tomorrow’.

Philip Shaw at Investec Economics said that the labour markets had given a green light to a December hike. 

‘Overall after today’s figures we are modestly more confident over our baseline case that the MPC will bite the bullet and raise the Bank rate by 0.15per cent to 0.25per cent next month,’ he added.

The Office for National Statistics said payrolled workers jumped by 0.6 per cent between September and October to 29.3 million – ‘well above’ levels seen before the pandemic struck.

The unemployment rate also fell once more to 4.3 per cent between July to September, down from 4.5 per cent between June and August, in spite of the furlough scheme coming to an end on September 30.

The data also showed that job vacancies reached a new record high, up 222,000 quarter on quarter to 1.17 million in the three months to October and 388,000 higher than before the pandemic as firms battled to hire amid mounting labour shortages.

October inflation figures tomorrow will be the last before the December MPC meeting. Analysts believe the rate will far outstrip the 3.1 per cent recorded in September, and likely be near-double the Bank of England’s 2 per cent target.

The MPC decided against an interest rate rise this month – despite giving every indication it would – but many believe the committee is unlikely to ‘bottle’ it again in December.

Analysts at Deutsche Bank have pencilled in a ‘big jump’ in the inflation report, driven by a surge in food and energy prices. 

Michael Hewson, chief market analyst at trading firm CMC Markets, said: ‘It’s not inconceivable we could see a move on the headline number to 4 per cent.

Bank of England governor Andrew Bailey (pictured) told the Commons Treasury committee that a major hurdle for an interest rate hike may have been cleared

Bank of England governor Andrew Bailey (pictured) told the Commons Treasury committee that a major hurdle for an interest rate hike may have been cleared

He said: ‘A big rise in this week’s October numbers will merely serve to shift the focus back on the Bank of England, and the potential for a possible rate move in December – though whether markets start to price such an outcome remains open to question after the shambles we saw at the beginning of the month.’

Bank of England governor Andrew Bailey told the Commons Treasury committee yesterday that he needed more evidence that the end of the furlough scheme in September had not resulted in a wave of job losses. That evidence seems to have emerged.  

The rise in inflation over the last few months has been driven by supply chain hold-ups and soaring energy prices, rather than fierce demand for goods.

This has led Bailey to cast doubt on how effective a rate hike would be in taming price rises. But yesterday he admitted to MPs that he was ‘very uneasy’ about the current levels of inflation, adding that ‘every meeting is in play’ when it came to lifting interest rates.

Despite Bailey’s inflation worries, he played down fears that the UK is headed towards a 1970s-style environment where the cost of living spirals out of control.

Even Michael Saunders, an MPC member who did vote for a rate rise at the meeting, told MPs there was little chance of a ‘wage price spiral’ – where businesses are forced to pay their workers more, which in turn causes the cost of living to jump as retailers put up their prices.

Catherine Mann, another member of the MPC, said households will be spending even more of their income on food and energy as costs are expected to rise further next year.

This would limit the amount of money that people can spare for other shopping, which could in turn weigh on businesses’ ability to pass on higher costs to their customers. All of this could ‘put a damper’ on inflation over the medium-term, she added.

But Saunders worried that by holding off on a rate hike for too long, the Bank might eventually have to jack up rates faster and more sharply than it would otherwise have done.

While higher interest rates are good for savers, they weigh on mortgage holders and other borrowers who will see the costs of their debt rise.