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Interest rates to remain on hold despite higher inflation

14 Septembre 2017

Data from the Office for National Statistics showed that the consumer prices of United Kingdom economy climbed 2.9 percent year-over-year in August, faster than the 2.6 percent rise in July.

Germany's year-on-year inflation rate for August is predicted to print at 1.8%, up from the previous period's 1.7%, whilst industrial production in the Euro Area is expected to jump from 2.6% in June to 3.6% in July.

"The rise in inflation in [clothing and footwear] may reflect changes in the exchange rate impacting on the cost of imported clothing since [the sector] is one of the most import-intensive categories in the basket", the ONS added.

Against the euro the pound has continued to fall, declining by 1.8% since Aug 3 and EURGBP is now trading at its weakest since 2009.

Inflation has shot past the BoE's 2 percent target - surging to its highest level in more than five years according to data released this week at 2.9 percent.

Mike Prestwood, head of inflation at ONS, said cheaper airfares partly offset big rises in clothing prices.

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With inflation at 2.6% this does still mean real wages are falling, but the pickup in wage growth should be a welcome sign for the Bank and one that could support growing calls for a hike by year-end. Month-on-month, input prices went up 1.6 percent in August, reversing a 0.2 percent drop in July.

The Bank of England may be preparing to warn both investors and regular Brits that they cannot expect interest rates to stay as low as they are forever, and that further rises in inflation in the coming months could lead to rising rates. The fall in the jobless rate to 4.3 percent in the three months to July, when Britain created jobs faster than at any time since 2015, might embolden the minority of the bank's policymakers who are pressing the case for an early hike in borrowing costs.

The Bank of England is seen through the columns of the Royal Exchange building in London.

The Bank is widely expected to leave interest rates unchanged but with other central banks in the process or preparing to reduce stimulus, traders are looking for any hint that the Bank might reverse the 0.25% interest rate cut delivered in 2016. Increasing rates will slow down inflation but it will also take money out of the pockets of consumers.

Andrew Sentance, senior economic adviser at PwC, said that, as the pound continues to to struggle on the foreign exchange markets, the surge in inflation has further to run.

Households have seen their spending power diminish as wage growth tracks below inflation.

For British workers, the lowest jobless rate in more than four decades isn't enough to maintain their standard of living.

Interest rates to remain on hold despite higher inflation