BOE to Decide on Interest Rate Hike Amid Inflation and Labour Market Concerns

The Bank of England is set to make its interest rate decision on Thursday, amidst rising inflation and a weakening labour market. The August Consumer Price Index (CPI) rose from 2.9% to 3.1% year-on-year, while monthly inflation accelerated to 0.5%. However, core CPI remained unchanged at 2.6%, providing some reassurance that the rise in headline inflation has not yet developed into a broad-based acceleration.

Producer costs are also accelerating, with input PPI rising to 6.1% and output-price inflation reaching 3.7%. This could lead to higher business costs that eventually filter through to consumers. The labour market, however, is a different story. Payrolled employment fell by 39,000 over the latest three-month period and by 84,000 from a year earlier.

The Bank of England has acknowledged the trade-off between guarding against inflation and avoiding unnecessary damage to an already fragile economy. Two MPC members voted for an immediate 25bp hike to 4%, arguing that early action would provide insurance against inflation becoming embedded.