U.K. Inflation Rate in November Lower Than Forecast

U.K. Inflation Rate in November Lower Than Forecast (Update2)

By Craig Stirling and Svenja O'Donnell

Dec. 18 (Bloomberg) -- The U.K.'s inflation rate was lower than economists forecast in November, suggesting the Bank of England has room to make further interest rate cuts to spur economic growth.

Consumer prices rose 2.1 percent from a year earlier, the same as in October, the Office for National Statistics said today in London. Economists predicted 2.2 percent, according to the median of 27 forecasts in a Bloomberg News survey. In the month, prices advanced 0.3 percent.

The pound fell as some investors bet policy makers will lower the Bank of England's benchmark rate more quickly than previously forecast and shelve concerns higher wage demands will fuel inflation. The central bank this month cut borrowing costs for the first time in two years as contagion from the U.S. subprime market collapse threatens the economy.

``This has increased the chances of a rate cut,'' said Steven Bell, chief economist at hedge fund GLC Ltd. in London. ``I think they'll cut in January and in February.''

The pound declined as much as 0.4 percent to $2.0116 after the inflation figures.

Policy makers including Deputy Governor Rachel Lomax said before this month's decision they faced a dilemma as they weighed the threat of inflation against the risk that higher credit costs will drag down economic growth.

Governor Mervyn King said record oil prices were ``complicating life'' and Citigroup Inc. analysts said Dec. 14 that Centrica Plc will lead a push by U.K. utilities to raise electricity and natural-gas rates for retail customers next year.

Wage Pressures

While wage pressures have shown little sign of picking up, labor unions may increase pay demands next year. Average earnings including bonuses rose an annual 4 percent in the three months through October, down from 4.1 percent in the period through September.

The retail price index, used by workers in pay negotiations, rose an annual 4.3 percent last month, up from 4.2 percent in October. The 23 economists surveyed by Bloomberg had forecast a reading of 4.2 percent.

``Significant price risks persist and inflation still seems set to rise further over the coming months,'' said Howard Archer, chief European economist at Global Insight Inc. in London. ``Much will depend on to what extent economic activity appears to be slowing, whether or not pay moderation continues in the early 2008 wage rounds, and whether companies' pricing power appears to be waning.''

Global Effort

Consumers' price expectations jumped to the highest in at least eight years in November, a central bank survey showed Dec. 13. Bank of England policy maker Paul Tucker said the same day that the bank is ``focused on anchoring inflation expectations.'

The U.K. central bank joined a coordinated global effort to ease money-market rates on Dec. 12 amid signs that commercial banks were reluctant to lend to each other, posing a risk to the economy. The bank is auctioning 10 billion pounds ($20.2 billion) in three-month loans today as part of that action.

A week before, the Bank of England reduced its benchmark rate by a quarter-point to 5.5 percent, citing signs that economic growth is starting to weaken. It said that ``upside risks to inflation remain.''

BLOOMBERG