Today the ONS has released the latest UK inflation data, showing that CPI stuck at 2.2% in the year to August – the same as in July. As investment strategists anticipate the Bank of England MPC’s decision on UK interest rates tomorrow, it seems as if today’s data hasn’t given much clout to those who would favour a further cut.
Given the close call last month with a 5 to 4 vote in favour of cutting, will we see a further fall in rates tomorrow? And we’re pretty sure we’ll see a cut from the Fed later today, the magnitude of that cut might well prove influential for the MPC tomorrow.
Investment managers and economists have been sharing their reaction to today’s inflation news with us as follows:
According to Richard Carter head of fixed interest research at Quilter Cheviot, the MPC are unlikely to drop rates further as he says: “Today’s inflation figures for August, which shows CPI has remained at 2.2% will likely bolster predictions that the Bank of England will hold rates as it prepares for its upcoming policy decision this week. The inflation data, which follows July’s rate of 2.2% will unlikely cause the BoE to want to diverge from its current plans especially given core inflation rose by 3.6% in the 12 months to August, up from 3.3% in July. However, the US Federal Reserve, which is expected to deliver a potentially larger-than-anticipated rate cut this week, may play a part in fuelling speculation about the speed of further monetary easing across the world.
While the US central bank is likely to cut rates by 0.25 or even 0.50 percentage points after its policy meeting on Wednesday, the Bank of England is more likely to take a cautious approach especially after today’s data. Despite recent data showing a stagnation in UK economic output and easing wage growth, core inflation remains sticky, with services inflation rising from 5.2% to 5.6% which will weigh heavily on the BoE’s decision-making. This complicates the central bank’s ability to justify further easing in the short term, especially when compared to the more aggressive stance of the Federal Reserve. The BoE’s quarter-point rate cut in August marked its first in over four years, but there is probably still a while yet until we get another cut.
The MPC has already cautioned investors not to expect sequential rate cuts at every meeting given inflation is still not cemented at the 2% target and is likely to rise further as the year continues. Despite stagnating growth over the summer months there is not going to be a swift rate cutting cycle and will only ease pressure on the economy gradually.“
Daniel Casali, chief investment strategist at wealth manager Evelyn Partners, comments:
“Although the core measure surprised on the upside in August, the broad downward trend in lower UK CPI inflation is intact, allowing the Bank of England (BoE) to cut interest rates over the coming months..
However, given that services CPI inflation remains elevated at 5.6% year-over-year and economic growth has picked-up in the first half of 2024, the BoE will probably take a cautious approach in loosening unless there is significant belt tightening coming after the budget on 30 October that dampens growth expectations.
Looking at it relatively, the futures markets point to a more rapid pace of rate cuts coming out of the US than in the UK. By June 2025, the market expects the Fed base rate to be 3.0%, compared to 3.5% for the BoE, when the current rates are 5.5% (upper bound) and 5.0%, respectively.
Higher relative rates in the UK are likely to play out through sterling appreciation against the US dollar. Other major currencies (i.e. the euro and yen) could also make gains against the US dollar as the Fed becomes dovish.
The bottom line here is that a weaker dollar indicates that there is greater supply of US dollars floating around the financial system compared to demand. On balance, this is favourable for equities, as investors seek a home to park their money.
Another beneficiary from US dollar weakness is gold bullion. As the greenback falls in value, the US dollar-denominated gold price becomes cheaper to non-dollar investors, and this creates demand.
Moreover, the gold price is supported by secular foreign central bank bullion purchases. This follows Western financial sanctions against Russia after its invasion of Ukraine: most notably the freezing of Russia’s overseas assets, including its holdings of US government debt. Such action may encourage other major holders of US treasuries, like China and Saudi Arabia, to recycle less of their trade surpluses into foreign bonds over fears that these assets could be seized in the future. Considering this risk, central banks outside Western financial systems will increasingly view gold – which can be held physically within national borders – as an alternative to government bonds, creating a new structural demand driver for bullion.
The broader trend of lower UK inflation should encourage the BoE to cut interest rates this year, but at a relatively slower pace compared to the US. Potentially, this should provide upside for the sterling exchange rate against the US dollar. Gold will continue to benefit from broad-based weakening in the greenback and secular bullion demand from central banks in emerging economies. Gold also provides some diversification qualities in portfolios to boot.”
UK price pressures inch higher, but remain restrained says Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services as he comments:
“This morning’s data confirms that UK inflation remains subdued, though underlying elements continue to inch higher. Headline prices increased by 0.3%in the last month, with the year-on-year rate holding steady at 2.2%, a slight uptick from the Bank of England’s 2% target achieved in June.
“This uptick owes largely to the Ofgem price cap adjustment, even as earlier service sector price pressures dipped before staging a partial rebound last month. Nonetheless, despite the slight increase in inflationary pressures, British households will be relieved as fuel and food prices dropped noticeably in August.
“Today’s data comes as many sit in anticipation of the Monetary Policy Committee’s meeting tomorrow. The decision to cut interest rates in August was a very close call, and Bank Governor Andrew Bailey has emphasised the importance of not cutting rates too much or too fast. Though economic activity is slowing ever so slightly, today’s figures suggest that the Bank will not be in a hurry to pursue back-to-back policy easing.”
Tim Graf, Head of EMEA Macro Strategy at State Street Global Markets, reacts to today’s UK CPI data saying:
“There were no surprises in today’s UK inflation data, with headline inflation steady at 2.2% yoy and core CPI rising to 3.6% yoy thanks to continued stickiness in service prices. It solidifies the belief, largely priced by markets, that the Bank of England will stand pat at tomorrow’s policy meeting. However, our PriceStats measures of online inflation show UK prices have been rising at a slower than normal pace since May and suggest gravity will win in the end and that the MPC will likely deliver more easing than is currently priced by rate markets.”
Luke Bartholomew, Deputy Chief Economist, abrdn, said: “It is hard to see this inflation report changing many minds at the Bank of England, with the data coming in pretty much exactly as expected. Certainly the fact that headline inflation is a touch above target will come as no surprise to policymakers. Of greater focus will be the fact that various measures of underlying inflation are still quite elevated. That helps explains why the Bank of England is likely to be somewhat more cautious than the US Federal Reserve in its easing cycle over the next few months. Indeed, the Bank of England now looks extremely likely to keep rates on hold tomorrow with the next cut probably coming in November.”
Tom Stevenson, investment director at Fidelity International, said: “The latest inflation data delivered another headache for the Bank of England’s rate setters. While the headline rate remains unchanged at 2.2%, close to the Bank’s target, core inflation remains sticky, up from 3.3% to 3.6%. Inflation in the important services side of the economy, driven in large part by wage growth, rose from 5.2% to 5.6%.
“The mixed messages in today’s inflation data underline the challenge the Bank of England faces in setting monetary policy in a less stable and predictable environment for prices. With the new Labour government pushing for higher growth and productivity, and without the stabilising forces of globalisation, cheap energy and EU membership, inflation is likely to be more volatile in future.
“However, the direction of travel for UK interest rates looks set even if the timing of rate cuts is not. With growth stagnating over the summer and headline inflation remaining close to target, the next cut looks nailed on for November, even if it does not come tomorrow. That should keep a lid on the pound, whether the Federal Reserve opts for the expected quarter point rate cut this week or the jumbo half point cut that remains a possibility.
“For investors, the window of opportunity to lock in higher interest rates on cash is starting to close.”
Hetal Mehta, Head of Economic Research at St. James’s Place, says: “The UK inflation numbers were very much in line with market expectations, with headline inflation steady and core inflation picking up. This should reinforce the Bank of England’s decision to go gradually with its interest rate cuts. At tomorrow’s meeting the focus will be on decisions regarding its balance sheet especially as the gilt sales have a bearing on the fiscal wriggle room the Chancellor will have at the upcoming Budget.”
