An interest rate rise from the Bank of England is being described as a “near certainty” as inflation breaks 3 per cent.
Sanlam UK investment analyst Matthew Brittain says they expect inflation to fall back towards 2 per cent in the coming months, attributing the rise to businesses passing on higher import costs.
But that view is “not necessarily shared by the Bank of England”, says Brittain.
“Today’s announcement makes an interest rate rise in November a near certainty as the Monetary Policy Committee takes action show they are keeping inflation under control,” says Brittain.
But Architas senior investment manager Nathan Sweeney argues the rate rising cycle is “severely limited” by slowing UK growth and pressure on households.
Sweeney suggests the central bank would be seeking leeway to fight the slowdown in growth rather tackle inflation if it does deliver policy action next month.
However, Tilney managing director Jason Hollands says the “age of record low interest rates is coming to an end”.
He notes sterling has staged a recovery versus the US dollar since the start of the year pointing to inflation peaking towards the end of the year and subsiding during 2018.
Share Centre chief executive Richard Stone says households with a variable rate mortgage or other loan will though see repayments increase modestly. “This will further squeeze the ability of the consumer to spend or save, at a time when real wages are falling again,” Stone says.
Hollands adds that it’s important for advisers to focus on headline rates of inflation, which is based on a basket of over 700 goods and services.
“We cannot emphasise enough the importance of factoring in inflation into clients financial plans and investment strategies. Inflation hurts your buying power, puts a squeeze on your standard of living and is the baseline you need to beat in investment returns just to stand still.”