about 4 years ago • 2 mins
The Bank of England’s (BoE’s) cautious approach to interest rate cuts seems to be paying off nicely: data out on Wednesday showed UK inflation – the rate at which the prices of goods and services increase – finally rose in January 🎉
Prices rose 1.8% from the year before, largely thanks to motor fuel, air travel, and energy costs. That’s the highest rate of inflation in six months, and higher than the 1.6% investors were expecting. It was also a big improvement on December’s inflation rate, which was the lowest in three years. Inflation’s now approaching the 2% target laid out by the UK’s central bank, which – after having held off cutting interest rates last month – might view Wednesday’s data as good reason not to change that position.
On the one hand, rising inflation and record UK employment could keep the BoE from cutting interest rates – and might even push the central bank to increase them if inflation rises too much. On the other, recent weak economic growth could still justify stimulating the economy with lower rates ⚖️ Investors are split on where they think interest rates are headed next, and that’s not the only consensus they’re yet to reach: there are plenty of disagreements about the UK’s potential trade deal with the European Union too.
During its last meeting, the BoE said it was pretty confident the UK would hit its 2% inflation target within the next three years, particularly since business sentiment should improve after Brexit 🇬🇧 But that timeline could come to a premature end: a new UK immigration system – which will reportedly be in place in the UK by 2021 – would prioritize high-skilled workers and, in the plan’s words, end “cheap labor from Europe”. That could increase the cost of producing goods and push the inflation rate upward.
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