Inflation may pave the way for interest rate hikes in the UK

While inflation in the UK is expected to rise to 3.4 percent in September, reaching a nine-month peak, it is considered that the data to be announced may pave the way for the Bank of England (BoE) to decide to increase interest rates at its meeting on November 5.

The rise in energy prices increases inflation pressures, making the government's budget plans difficult as well as monetary policy.

According to economists' forecasts, annual inflation is expected to reach 3.4 percent in September, according to the data to be announced on Wednesday. Realization of expectations may lead to new steps in the fight against inflation.

The Bank of England predicts that inflation could exceed 4 percent in early 2027 due to the increase in energy prices and the prolongation of conflicts in the Middle East. Price increases, which are well above the bank's 2 percent inflation target, make it difficult to keep interest rates constant.

Expectations that the BoE will increase interest rates at its meeting to be held on November 5 are growing stronger in the markets. Bloomberg Economics also believes that rising inflation, strong demand and stability in the labor market may necessitate an interest rate increase. The institution expects a new interest rate increase in February, as well as a 25 basis point increase in November.

The sales in the global bond market following the rise in energy prices are increasing borrowing costs in the UK and narrowing the government's financial room for action. Government bond yields are approaching the high levels of recent years, making financing public expenditures more costly.

Although Finance Minister John Healey aims to provide relief to businesses and households in the budget to be announced next week, rising borrowing costs are complicating these plans. It is also possible that tax increases will be on the agenda to finance measures to reduce the cost of living.

Inflation data, on the one hand, will shape expectations regarding the Bank of England's interest rate decision and, on the other hand, will have an impact on the government's budget preferences.