The Bank of England is likely to raise interest rates as soon as November following today's Monetary Policy Committee meeting, when the majority of members agreed that monetary stimulus should be withdrawn over the coming months in the face of rising inflation, Capital Economics says.
But all eyes will be on its chief economist, Andy Haldane, to see if he switches sides and joins the two members of the central bank's Monetary Policy Committee who have been voting in vain to reverse last year's quarter-point cut in rates.
"Inflation was lifted in August by a renewed rise in petrol prices after they had fallen back over the previous five months".
"Lagging wages makes it more likely the Bank of England will look through rising inflation when it decides on interest rates this week", said Ed Monk of fund manager Fidelity International.
The pound is up against both the U.S. dollar and the euro ahead of the Bank of England's rate setting meeting. Furthermore, there still remains a great deal of uncertainty in regards to the type of Brexit deal that will be struck - one of the primary arguments for keeping rates low.
"Clearly the Bank isn't overly concerned about yesterday's poor wage growth data, and sees the United Kingdom economy picking up more quickly than expected", said Hamish Muress, currency analyst at OFX.
But it said it was "unclear how sustained any increase in GDP growth might be over the medium term", citing unknowns about how households and businesses would react to the Brexit process.
The BoE's step toward tighter monetary policy comes as the Federal Reserve is gently increasing short-term interest rates in the USA and the European Central Bank ponders when to round off its multi-trillion euro asset purchase programme amid a buoyant eurozone economy.
Six-month Sterling Overnight Index Average (SONIA) swap rates, which reflect market expectations for interest rates, hit their highest since June 24, 2016, the day of the Brexit vote result, at 32.20 basis points GBP6MOIS=. The two dissenters, Ian McCafferty and Michael Saunders, pushed for an immediate rise in interest rates.
This morning, traders in the City viewed a rate rise as more likely than not by February, now they expect it by December. Unemployment is the lowest in 42 years and inflation exceeds its 2% target. The surge was largely due to a weaker pound as the sector is highly import-intensive, the ONS said.
Inflation has now returned to a four-year high of 2.9 per cent, while core-inflation has risen to a six-year high of 2.7 per cent.
Credit Agricole CIB Research: We believe there is little scope of changing central bank rate expectations.
United Kingdom labour market conditions are strong and inflationary pressures are heating up, a combination that has seen markets get excited about the prospect of a rate hike from the Bank of England (BoE), potentially before the year is out. The median forecast had been for a slightly softer 2.8% y/y reading.