Bailey suggests a Christmas interest-rate hike, as the prices go up: Inflation expected to reach 3.9%

Tomorrow’s inflation figures will be released in what top economists consider to be the last reading before an increase in interest rates pre-Christmas.

Analysts believe inflation will come in at 3.9 per cent for October, above the 3.1 per cent recorded in September, and far outstripping the Bank of England’s 2 per cent target.

The Bank’s Monetary Policy Committee (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.

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

Inflation rate hike: Analysts predict that inflation will rise to 3.9% in October. This is higher than the September 3.1% and well above the Bank of England’s target of 2%. 

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.

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.’

The Commons Treasury Committee hears talk of an interest rate rise after Andrew Bailey, Bank of England Governor, told yesterday’s Commons Treasury committee that there may be a significant hurdle to any rate increase. 

Bailey stated that he required more proof to prove the Bank’s decision not to lower interest rates from their low point of 0.1% in September.

A rising unemployment rate and higher interest rates could cause financial problems for households, which in turn can lead to economic weakness.

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

Andrew Bailey, Bank of England Governor (pictured), told the Commons Treasury Committee that there may be a way to get around a significant hurdle in favor of an increase in interest rates

New data over the past two weeks shows there have been very few job losses since the furlough programme ended. There is a possibility the Bank may raise rates to 0.25 percent.

Supply chain problems and high energy prices have caused inflation to rise over the past months. There has not been a lot of demand for products.

Bailey is now unsure how effective rate increases would be at reducing 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 is another MPC member. She said that households would spend more on energy and food as the cost of fuel will rise 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.

Saunders was concerned that if the Bank holds off on raising rates for too long it might have to raise them faster than normal.

Although higher interest rates may be good news for savers they can also impact mortgage holders as well as other borrowers. They will increase the cost of debt.