A wet Piccadilly Circus on a rainy morning in the West End, on 26 September 2024, in London, England.
Richard Boulanger | In pictures | Getty Images
LONDON — Inflation in the United Kingdom fell sharply to 1.7% in September, the Office for National Statistics said Wednesday, reinforcing market expectations of a Bank of England rate cut in November.
Economists polled by Reuters had expected the policy rate to rise to 1.9% for the month, the first cut below the BoE’s 2% target since April 2021.
Inflation has been hovering around this level for four months and stood at 2.2% in August.
Core inflation, which excludes energy, food, alcohol and tobacco, stood at 3.2% for the month, down from 3.6% in August and to the 3.4% predicted by a Reuters survey.
Price inflation in the services sector, the dominant part of the UK economy, eased significantly to 4.9% last month from 5.6% in August, now reaching its lowest rate since May 2022 .
Core and services inflation are key monitoring points for Bank of England policymakers, who are considering whether to cut interest rates again at their November meeting.
Cuts forward?
Money market prices for a 25 basis point rate cut in November rose from 80% to 92% following the latest inflation data, with a follow-up cut in December almost fully priced in. lower wage growth reported by the ONS this week supported the case for a rate cut.
Two more cuts of a quarter of a percentage point this year would bring the BoE’s key rate back to 4.5%, after the central bank launched rate cuts in August and then maintained them in September.
A fall in the Pound sterling Wednesday’s release reflected more dovish expectations for the BoE, with the British pound losing 0.6% against the US dollar at $1.299, falling below the $1.3 level for the first time since September 11. The British currency fell by 0.5% against the euro.
Yields on British government bonds, known as Gilts, have meanwhile fallen across the board. Yield on two-year government bonds fell by 9 basis points while 10-year government bond yield fell 7 basis points.
Pound Sterling versus US Dollar.
Headline inflation in the UK fell from a peak of 11.1% in October 2022 to 1.7% in September.
“These figures provide reassurance that the UK has entered a more subdued inflation environment, helped by falling fuel prices,” Suren Thiru, economic director at the Institute of Chartered Accountants, said in a note. of England and Wales. ” in services inflation, indicating that “underlying price pressures are becoming less persistent.”
Thiru nevertheless added that UK inflation could reverse its downward trend in October due to an increase in the energy price cap set by the regulator, while the BoE will wait to assess the Labor government’s decision British. highly anticipated first budget at the end of the month for any potential inflationary impact before setting a course.
Paul Dales, chief economist at Capital Economics in the UK, was equally cautious, pointing out that much of the unexpected weakness in core and services inflation was due to a sharp decline in inflation increases. price of plane tickets. As a result, the BoE is slightly more likely to stick to 25 basis point cuts at every other meeting, Dales said, although the chances of two more cuts this year have now increased.
“We still think rates will eventually fall to 3.00%, which is lower than the 3.50 to 3.75% the market is expecting,” he said.
However, Deutsche Bank’s UK chief economist Sanjay Raja said the inflation figures would be “music to (the Monetary Policy Committee’s) ears” and could lead them to consider an unwinding faster rate of restrictive policy, including sequential rate reductions.
Raja also highlighted the risk presented by the budget, which he said was “likely expansionary despite the scale of fiscal consolidation scheduled for October 30.”
