Rainy Piccadilly Circus on a wet morning in London’s West End, UK, September 26, 2024.
Photograph by Richard Baker | Getty Images
LONDON – The inflation rate in the UK saw a notable decline, falling to 1.7% in September, according to a report released by the Office for National Statistics on Wednesday. This drop has prompted market analysts to increase their predictions for a potential interest rate cut by the Bank of England in November.
Financial experts surveyed by Reuters had anticipated inflation to be at 1.9% for the month, which would have kept it above the central bank’s target of 2% for the first time since April 2021. Inflation levels have been relatively stable over the past four months, recording a figure of 2.2% in August.
Core inflation, which excludes volatile categories such as energy, food, alcohol, and tobacco, decreased to 3.2% in September, down from 3.6% in August, and fell short of the 3.4% forecast from a Reuters poll.
Additionally, the rate of price increases in the services sector, a crucial component of the UK economy, saw a significant slowdown to 4.9% last month, compared to 5.6% in August, marking the lowest rate since May 2022.
Both core and services inflation are critical areas of focus for policymakers at the Bank of England as they prepare to deliberate potential interest rate decisions in November.
Are Rate Cuts on the Horizon?
In light of the recent inflation data, market expectations for a 25 basis point reduction in interest rates for November have surged from 80% to 92%, with nearly complete anticipation for another cut in December. Analysts pointed to a decline in wage growth as a contributing factor in the statistical report. The ONS has strengthened the argument for a rate reduction.
If the central bank initiates interest rate reductions this year, starting in August and continuing into September, followed by two quarter-point cuts, the Bank of England’s key rate could potentially reach 4.5%.
In response to the announcement, the British pound experienced a 0.6% drop against the US dollar, falling to $1.299, dipping below the $1.3 threshold for the first moment since September 11. Additionally, the pound fell by 0.5% against the euro.
At the same time, yields on UK government bonds, known as gilts, decreased across the board, with the yield for two-year bonds falling by 9 basis points and the yield for ten-year bonds dropping by 7 basis points.
British pound versus US dollar.
UK inflation has dramatically decreased from a peak of 11.1% in October 2022 to 1.7% as of September this year.
Suren Tirou, economics director at the Institute of Chartered Accountants in England and Wales, expressed optimism about these statistics, stating that they indicate a movement towards a more stable inflationary environment, aided by lower fuel prices. He emphasized that the significant drop in services inflation suggests that fundamental price pressures are easing.
However, Mr. Tirou noted that the inflation rate could reverse its downward trend in October due to a price cap increase on energy set by regulators, anticipating the return of the UK Labor government’s expected policy shift by the end of the month. He emphasized the need to analyze the budget’s potential implications thoroughly before deciding on future courses of action.
Paul Dales, chief UK economist at Capital Economics, voiced cautious sentiments, commenting that much of the surprising decline in core and services inflation can be attributed to a significant drop in airline fares. He believes that while additional rate cuts are likely, the Bank of England may adopt a measured approach, implementing smaller rate reductions at alternating meetings.
“We anticipate interest rates will eventually drop to 3.00%, which is lower than the 3.50-3.75% expectations in the market,” he asserted.
Conversely, Sanjay Raja, chief UK economist at Deutsche Bank, described the inflation report as “music to the Monetary Policy Committee’s ears,” suggesting it may prompt an early easing of restrictive measures, including gradual interest rate cuts. He acknowledged the risks entailed by the impending budget, stating, “Despite significant fiscal consolidation expected on October 30, it may nevertheless be somewhat expansionary.”
