UK inflation has plummeted to 1.7%, below the Bank of England’s (BoE) target for the first time in three years, sending shockwaves through the money markets, which now indicate a 91% probability of a quarter-point interest rate cut at the BoE’s upcoming meeting in early November.
Just before the latest inflation figures came out, traders saw an 80% chance of the BoE cutting rates. Money markets now predict a 91% chance of a quarter-point cut from the Bank of England at its next meeting in early November. If markets are correct, Threadneedle Street would reduce the UK interest rate from 5% to 4.75%.
Earlier this month, BoE Governor Andrew Bailey hinted at a potentially “more aggressive” approach to interest rate cuts, contingent on continued positive inflation trends.
“Price pressures continue to recede in the UK,” said Debapratim De, director of Economic Research at Deloitte. “Softening wage growth and services pricing indicate further easing in the coming months. With inflation in retreat and UK growth slowing, the Bank of England is likely to follow its August rate cut with another 25 basis point reduction in November.”
Read more: UK inflation drops below 2% target for first time since 2021
Tuesday’s data revealed a slowdown in wage growth, which could further encourage the BoE to implement a rate cut. Gora Suri, economist at PwC, also said that the likelihood of a November rate cut has strengthened. “The headline CPI inflation came in at 1.7% in September, primarily driven by declines in motor fuels and airfares. This trend suggests we may be at the tail end of the disinflationary process, which is positive for policymakers, consumers, and businesses.”
Markets also noted a significant decline in services inflation, which fell from 5.6% in August to 4.9% in September, marking its lowest level since May 2022. Analysts had anticipated a drop to 5.2%. Also, core inflation, excluding volatile food and energy prices, dropped more than expected from 3.6% to 3.2%.
Paul Dales, chief UK economist at Capital Economics, warned that most of the bigger fall in core inflation and services inflation was due to the sharp drop in airfares inflation “which the Bank won’t consider a sign that domestic price pressures are becoming less persistent”.
He added: “Overall, a 25 basis points cut in interest rates from 5% to 4.75% at November’s policy meeting already seem nailed on before today’s release.
“The chances of that being immediately followed by another 25bps cut at the following meeting in December has just gone up. At the moment, though, we think the Bank will keep rates on hold at the meeting.
“But we still think rates will eventually fall to 3%, which is lower than the 3.5% to 3.75% priced into the market.”
Read more: Pound falls sharply as inflation drops below Bank of England’s 2% target
Neil Birrell, chief investment officer at Premier Miton Investors, said that the current inflation figures present a clear pathway for the BoE to cut rates. “The government may view this as a boon for their fiscal policy. Conversely, one could interpret this as a sign that economic activity is decelerating faster than anticipated, prompting a need for stimulus from the Bank—though such stimulus may conflict with fiscal tightening in the upcoming Budget.”
As the markets price in a likely rate cut by the BoE, ICAEW economics director Suren Thiru said that the latest figures provide reassurance that the UK is transitioning to a more moderate inflation environment, aided by lower fuel prices. However, he cautioned that September’s decline could reverse this month due to rising energy bills following Ofgem’s energy price cap increase, which might push the headline rate above the BoE’s 2% target.
Thiru added that while the conditions appear favourable for a November rate cut, the upcoming budget poses a crucial consideration for policymakers.
“Though the stars are aligning for a November rate cut, the upcoming Budget is the final hurdle as rate setters will want to assess the inflationary impact of any measures announced before loosening policy again,” he said.
Chancellor Rachel Reeves will deliver her autumn statement on 30 October, with the Bank of England set to announce its decision on interest rates on 7 November.
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