Piccadilly Circus on a wet rainy morning in the West End on 26 September 2024 in London, England.
Richard Baker | In pictures | Good pictures
LONDON – Inflation in the UK eased sharply to 1.7% in September, the Office for National Statistics said on Wednesday, raising market expectations for a Bank of England rate cut in November.
Economists polled by Reuters had expected the headline rate to come in at 1.9% for the month, the first decline since April 2021, ahead of the BOE’s 2% target.
Inflation has been hovering around that level for the past four months, reaching 2.2% in August.
Core inflation, excluding energy, food, alcohol and tobacco, was 3.2% for the month, down from 3.6% in August and below the 3.4% forecast in a Reuters poll.
Inflation in the services sector, the dominant part of the UK economy, slowed significantly to 4.9% last month from 5.6% in August and is now at its lowest rate since May 2022.
Core and services inflation are key watchpoints for Bank of England policymakers as they consider whether to cut interest rates again at their November meeting.
Cuts ahead?
The money market price for a 25-basis-point November rate cut rose from 80% to 92% following the latest inflation print, with a follow-up trim in December almost fully priced. analysts said on Tuesday. The low wage growth rate reported by the ONS this week supported the case for a cut.
Two more quarter-percentage-point cuts this year would take the BOE’s key rate to 4.5%, after the central bank kicked off rate cuts in August and then held in September.
A fall British pound Reflecting more bearish expectations for the BOE following Wednesday’s release, it fell 0.6% to $1.299 against the dollar, falling below the $1.3 level for the first time since Sept. 11. The British currency fell 0.5% against the euro.
Meanwhile yields on British government bonds, known as gilts, fell across the board. Two-year gilt yields fell by 9 basis points 10-year gilt yield Down 7 basis points.
British Pound against the US Dollar.
UK inflation eased to 1.7% in September from a peak of 11.1% in October 2022.
Suren Thiru, director of economics at the Institute of Chartered Accountants in England and Wales, said the figures confirm that the UK has moved into a more moderate inflationary environment thanks to lower fuel prices. “Services inflation indicates that “underlying price pressures are becoming less sticky.
However, he said British inflation could reverse its decline in October, while the BOE will wait to assess the UK Labor government’s eagerly anticipated first budget at the end of the month. Inflationary impact before locking in a course.
Paul Dales, chief UK economist at Capital Economics, was similarly cautious, pointing out that much of the unexpected weakness in core and services inflation was due to a large drop in air fares. Even though the prospect of two more cuts this year has now risen, the BOE is slightly more likely to stick with 25-basis-point cuts at every other meeting, Dales said.
“We still think rates will eventually come down to 3.00%, which is lower than the 3.50-3.75% the market is pricing in,” he said.
However, Sanjay Raja, chief UK economist at Deutsche Bank, said the inflation figures would be “musical”. [Monetary Policy Committee’s] ears” and may lead them to consider a rapid disintermediation of restrictive policy, including sequential rate cuts.
Raja also pointed to the risk of presenting the budget, which is “likely to be expansionary despite the scale of fiscal consolidation on October 30”.
