UK Inflation Takes a Tumble: What Does it Mean for Interest Rates?
The UK’s inflation rate has plummeted to 1.7% in September, according to the Office for National Statistics. This sharp drop has sparked expectations of a Bank of England rate cut in November, with economists predicting a 25-basis-point reduction.
A Shift in Market Expectations
The headline rate has fallen below the Bank of England’s 2% target for the first time since April 2021, leading to a significant shift in market expectations. Money market pricing for a November rate cut has jumped from 80% to 92%, with a follow-up trim in December nearly fully priced in.
Core Inflation Eases
Core inflation, which excludes energy, food, alcohol, and tobacco, has also decreased to 3.2% for the month, down from 3.6% in August. This drop is seen as a key indicator for Bank of England policymakers, who are considering whether to cut interest rates again at their November meeting.
Services Sector Sees Significant Easing
Price rises in the services sector, which dominates the UK economy, have eased significantly to 4.9% last month from 5.6% in August. This is the lowest rate since May 2022, and analysts believe it supports the case for a rate cut.
Pound Takes a Hit
The British pound has fallen 0.6% against the US dollar, below the $1.3 level for the first time since September 11. The pound has also dropped 0.5% against the euro.
Gilts Yields Fall
The yields on British government bonds, known as gilts, have dropped across the board. Two-year gilt yields fell 9 basis points, while the 10-year gilt yield fell 7 basis points.
Experts Weigh In
Economists are cautiously optimistic about the inflation figures, with some predicting that British inflation could reverse its decline in October due to an increase in the regulator-set energy price cap. Others believe the Bank of England will wait to assess the UK Labour government’s debut budget at the end of the month for any potential inflationary impact before locking in a course.
What’s Next for Interest Rates?
While the chances of two more rate cuts this year have increased, experts are divided on the pace of future rate reductions. Some predict that the Bank of England will stick to 25-basis-point cuts at every other meeting, while others believe the central bank may consider a faster unwinding of restrictive policy, including sequential rate cuts. One thing is certain – the UK’s inflation landscape has changed, and interest rates are likely to follow suit.
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