With inflation dropping to 6.7% in August, will the Bank of England decide to put interest rates on hold or go ahead with an anticipated 0.25% increase?
Figures from the Office for National Statistics released on Wednesday showed the consumer price index fell from 6.8% in July to 6.7% in August, bucking economists’ expectations that inflation would rise last month as a result of higher oil prices.
Core CPI eased to 6.2% from 6.9%, below consensus estimates of a smaller easing to 6.8%.
The largest downward contributions came from food, where prices rose by less in August than a year ago, and accommodation services.
The lower figures raised a question mark over whether the Bank of England would continue with its cycle of interest rate hikes when the Monetary Policy Committee meets on 21 September .
Danni Hewson, head of financial analysis at AJ Bell, said: “Just like that what had seemed like a sure thing is cast into doubt. Moments after the shock inflation number was released, the market expectation of a Bank of England rate rise began to plummet.
“Within half an hour what had been a pretty nailed on 80% expectation of another quarter percentage point hike fell to a 50/50 chance that MPC members would vote to press pause on this rate hiking cycle, at least for now.
“After a slew of profit warnings from UK PLC yesterday and a GDP figure that sat badly for the UK economy, the news that inflation has continued to cool is likely to give policy makers enough wiggle room to adopt a wait and see strategy. Although inflation is falling, that doesn’t mean prices are coming down, and if the Bank of England has grounds to at least skip this rate hike that’s because cracks are beginning to form.”
However, others anticipate that the Bank of England will continue to raise interest rates on Thursday by a further 0.25% before potentially pressing pause later this quarter.
Modupe Adegbembo, G7 economist at AXA Investment Managers, said: “We continue to expect the BoE to hike by 25 basis points bringing Bank Rate to 5.5%, though today’s downside surprise particularly on the core component raises the risk that the BoE remains on hold. On balance we don’t think today’s print is enough to dissuade the BoE from hiking, given wage pressures, but adds to our view that the Bank will be on hold from November.”
Charles White Thomson, CEO at Saxo UK, said: “The UK remains an inflationary outlier and the pressure remains on the Bank of England to suppress and manage inflation – or public enemy number one – and we expect a 25bp interest rate hike to 5.5%.”
Rob Morgan, chief investment analyst at Charles Stanley, said that despite expectations that interest rates will rise further, today’s figures suggest the UK may be reaching its interest rate peak.
“Getting the inflation genie back into the bottle has been a struggle for the Bank of England as it grapples with the highest rate of inflation among the world’s developed economies. However, there is now light at the end of the tunnel, and although one more rise is still likely it is also possible that we are at the peak for interest rates given the weakness evident in the economy and that the full effects of previous rate increases are still to be seen,” said Morgan.
“However, current elevated interest rates are set to stick around given the BoE’s 2% inflation target is still a long way off, and it’s unlikely we will see rate cuts until well into next year. Overall it means an interest rate trajectory that looks more like Table Mountain than The Matterhorn – as BoE Chief Economist Huw Pill recently described it.”
Jonny Black, chief commercial and strategy officer at abrdn, said advisers must use the opportunity to support clients and explain the implications of slowing inflation.
Black said: “Falling inflation is good news, but it makes it more important for advisers to explain to clients that this does not mean prices are coming down – it just means they’re increasing more slowly.
“The Bank of England can’t rest on its laurels just yet as inflation and interest rates remain a complicated balancing act, and eyes are now fixed on tomorrow’s Monetary Policy Committee decision and its impact on people’s finances. These are uncertain and challenging times, but that shouldn’t mean considerable changes in client strategies. The support of an adviser will be critical to keeping clients firmly focused on their future goals, and avoiding any steps that could prove damaging in the long-term.”
