How much inflation will the BOE tolerate before acting?
If inflation continues to rise, this will be the question on the market's lips.
Controlling inflation is a tricky task in any country, and it's particularly tricky in the UK. Due to the fact we're net importers, and energy is one of our biggest imports, we are very open to currency changes and general price changes. Right now the UK is getting it double. The currency has fallen and the price of oil has gone up.
The BOE can't do anything about the price of oil/energy but they can do something about the currency. Naturally raising rates would lift the currency. It would also squeeze wallets a bit more thus reducing spending. That's flimsy thinking at the best of times. If everything is going up in price then raising rates can cause more harm than good. Food still needs to be bought, homes need to be heated and cars refuelled. While luxuries and recreational items drop off the spending list, the staples still need buying.
The currency effect is potentially the biggest tool to curb inflation, in the near-term but in the midst of this Brexit mess, that may not work as that millstone could keep the pound in check against a tightening BOE. That could be disastrous for the BOE as rate hikes would have a redundant effect on inflation, and all it would do is push people further into debt.
Irrespective of that analysis, the BOE will have to act if inflation rises, and that level will be a break of the BOE's target of 2.0%. The core number will be the one they act on so it's the one we need to watch. If I had to pick a number I would say the core at somewhere between 2.5% & 3.0% would be where the BOE would take the plunge. If we get to 2%, expect the questions to start being asked and the BOE responding verbally.
The easy route for the BOE is to start by reversing last August's cut. That would put things back as they were before the Brexit uncertainty they covered straight after the vote.
The other scenario where they would feel comfortable raising rates is if wages continued rising. We'll see if that continues tomorrow when we get the latest jobs report.
Inflation is a beast that's rarely controllable and the BOE has always found it tough. This time they'll have their toughest test yet.
Someone has a lot of thinking to do.