Britain’s annual inflation rate plummeted to a three-year low in September, prompting widespread speculation that the Bank of England will lower interest rates for the second time in as many months. The decline, attributed primarily to cheaper airfares and fuel, signals a cooling economy and strengthens the case for monetary easing.
Britain’s inflation rate rose in July, driven by rising energy prices, pushing it back above the Bank of England’s 2% target. This development could potentially delay further interest rate cuts by the BoE, as analysts remain cautious about persistent price pressures.
British pay growth slowed to its weakest pace in nearly two years, suggesting inflation pressures are easing, while unemployment surprisingly dropped to its lowest level since February. This data may encourage the Bank of England to consider cutting interest rates further. Despite the slowing wage growth, real wages are improving and the number of job vacancies remains high.
British consumer prices rose by 2.3% in annual terms in April, slowing from a 3.2% increase in March, the Office for National Statistics said on Wednesday. The Bank of England and economists polled by Reuters had forecast an annual rate of 2.1%.
Britain’s economy grew by the most in nearly three years in the first quarter of 2024, ending the shallow recession it entered in the second half of last year and delivering a boost to Prime Minister Rishi Sunak ahead of an election.
The FTSE 100 index experienced a slight setback after reaching an all-time high earlier in the day. Bank economist Huw Pill’s comments hinted that an imminent interest rate cut may not be as likely as some analysts had anticipated. Despite the retreat, the index remained positive for the day, driven by a weaker pound and optimism about easing Middle East tensions.
A recent Reuters poll surveyed 63 economists to gauge their expectations regarding the Bank of England’s upcoming policy decisions. The poll provides insights into market sentiment and forecasts for interest rate changes and economic growth.
HSBC analysts anticipate a Swiss franc (CHF) rally and a potential rate cut by the Bank of England (BoE), leading to a sell recommendation for GBP/CHF. They believe CHF shorts appear vulnerable and the currency remains resilient. Despite elevated services inflation and wage growth in the UK, HSBC expects the BoE to ease monetary policy, with a possible rate cut in June. The analysts recommend selling GBP/CHF at 1.1350, a level the currency reached on Tuesday following comments from Monetary Policy Committee member Catherine Pill.
Huw Pill, the chief economist at the Bank of England, has indicated that interest rate cuts are now somewhat closer than they were last month. However, he cautioned that the economic outlook has not changed substantially, and there are risks associated with reducing rates prematurely.
After previously mirroring the U.S. Federal Reserve’s rate hike cycle, the Bank of England has signaled a shift towards a more dovish stance, citing divergent inflation outlooks between the UK and the US. Investors now anticipate two rate cuts in the UK this year, with the first expected in August. This change in market expectations underscores the Bank’s assessment that the UK’s inflation outlook is ‘rather different’ from the US, with disinflationary pressures expected to intensify in the coming months. The Bank’s dovish communication, including a potential downgrade of the forward guidance on keeping rates restrictive for an ‘extended period,’ could further support the case for an imminent policy easing. This divergence from the Fed’s expected rate cuts in September marks a departure from the recent pattern of synchronized rate hikes and highlights the Bank’s independence in policy-making.
