Surprise uptick in inflation may put paid to rate cut

The City was divided on the prospects of an interest rate cut this side of Christmas after the publication yesterday of figures showing a bigger-than-expected rise in inflation last month.

The City was divided on the prospects of an interest rate cut this side of Christmas after the publication yesterday of figures showing a bigger-than-expected rise in inflation last month.

The target rate of inflation – the one used by the Bank of England when setting rates – rose to 2.3 per cent in the year to October compared with expectations of an increase to 2.2 per cent. However this is still well below the 2.5 per cent figure targeted by the Monetary Policy Committee for RPIX – which strips out volatile mortgage payments. The headline rate of inflation rose to 2.1 per cent.

All eyes will now turn to the release this morning of the Bank's quarterly inflation report for clues as to its thinking on rates and also how the MPC voted at its meeting earlier this month when the cost of borrowing was held at 4 per cent.

The bigger-than-expected jump in inflation in October, the result of higher house and petrol prices, helps explain why the Bank decided not to follow the lead of the US Federal Reserve and cut interest rates.

The inflation figures came alongside a gloomy assessment of business optimism from the CBI showing that confidence dipped last month in all but one of the UK's 11 regions. The CBI also forecast 33,000 job losses in manufacturing before Christmas.

Commenting on the inflation figures, Philip Shaw of Investec, said the upward move would prove temporary and further "disinflationary" pressures would begin to push the targeted measure down again. "On balance this outlook may still trigger a base rate cut, even against a background of a surging housing market," he added.

The economics team at Barclays Capital meanwhile said it still expected the Bank to forecast an undershoot of its inflation target for most of the next two years when it presents its inflation report today.

However, John Butler of HSBC said: "We believe there is little chance of a rate cut in the foreseeable future." He forecast that the target inflation rate would be at or above 2.6 per cent by next month and also said he expected the Bank to revise upwards its inflation profile for the next six to nine months.

The CBI regional trends survey, carried out in conjunction with Experian Business Strategies, showed that only manufacturers in the East Midlands recorded an upturn in confidence about the general business situation. The steepest fall in optimism was in the South-west.

Meanwhile, the Engineering Employers Federation joined with the CBI in calling on Gordon Brown not to load any more taxes onto industry in this month's pre-Budget report.

Against a backdrop of an uncertain international outlook, falling output and rising cost pressures, the Chancellor should come to industry's aid by tackling rising insurance and pension costs and reducing the impact of the climate change levy.