The Office for National Statistics reported that inflation in the U.K. dropped to 1.7% in September, below the Bank of England’s 2% target for the first time since April 2021. Economists had expected a rate of 1.9% for the month. Core inflation, excluding certain components, came in at 3.2%, down from 3.6% in August. Services sector price rises also eased to 4.9%, the lowest rate since May 2022. These figures are key indicators for the Bank of England as they consider potential interest rate cuts at their November meeting.
Market expectations for a November rate cut by the Bank of England rose following the latest inflation data. Money market pricing now shows a 92% chance of a 25-basis-point rate cut next month, with a further cut in December almost fully priced in. Analysts point to lower wage growth reported by the ONS as supporting the case for a rate cut. A fall in the British pound and a drop in government bond yields also reflected more dovish expectations for the central bank. Two more quarter-point rate reductions this year would take the key rate to 4.5%.
Inflation in the U.K. has eased significantly from its peak of 11.1% in October 2022, with September’s rate at 1.7%. However, experts warn that inflation could reverse its decline in October due to an increase in the regulator-set energy price cap. The Bank of England will carefully assess the government’s upcoming budget announcement at the end of the month for any potential inflationary impact before making decisions about interest rates. Despite the recent drop in inflation, underlying price pressures could still be a concern for policymakers.
While some analysts believe that the Bank of England is likely to stick to 25-basis-point rate cuts at alternating meetings, the chance of further reductions this year has increased. Capital Economics’ Chief U.K. Economist Paul Dales predicts that rates will eventually fall to 3.00%, lower than what is currently priced into the market. on the other hand, Deutsche Bank’s Chief U.K. Economist Sanjay Raja believes that the latest inflation figures could lead the Monetary Policy Committee to consider a faster unwinding of restrictive policy, including sequential rate cuts. Raja also pointed out the risks presented by the government’s budget, which is expected to be expansionary despite fiscal consolidation efforts.
Overall, the recent drop in inflation in the U.K. has raised expectations for a potential interest rate cut by the Bank of England in November. Market analysts, economists, and experts are closely watching economic indicators such as core inflation and services sector price rises to gauge the central bank’s future decisions. The impact of the government’s budget announcement at the end of the month will also play a key role in determining the direction of monetary policy. Despite the decrease in inflation, concerns remain about underlying price pressures and the potential for inflation to rise once again in the future.
