UK inflation September 2024

LONDON – Inflation in the United Kingdom fell sharply to 1.7% in September, the Office for National Statistics said on Wednesday, raising market expectations of a Bank of England rate cut in November.

Economists polled by Reuters expected the headline rate to rise 1.9% for the month, the first drop below the BOE’s 2% target since April 2021.

Inflation has been hovering around that level for the past four months and hit 2.2% in August.

Core inflation, which excludes energy, food, alcohol and tobacco, hit 3.2% for the month, down from 3.6% in August and below a survey forecast of 3.4%. from Reuters.

Price rises in the services sector, the dominant part of the UK economy, slowed significantly to 4.9% last month from 5.6% in August, now reaching their lowest rate since May 2022.

Core and services inflation are key points to watch for Bank of England policymakers as they mull whether to cut interest rates again at their November meeting.

The money market price for a 25 basis point rate cut in November jumped from 80% to 92% after the latest inflation figure, with a follow-up cut in December almost fully priced in. Analysts had said on Tuesday the lower wage growth reported by the The ONS this week supported the case for a rate cut.

Two more quarter-point reductions this year would take the BOE’s key rate to 4.5%, after the central bank initiated rate cuts in August and then maintained them in September.

a fall in british pound Wednesday’s release reflected more moderate expectations for the BOE, with sterling falling 0.6% against the US dollar to $1.299, falling below the $1.3 level for the first time since 9/11. . The British currency fell 0.5% against the euro.

Meanwhile, yields on British government bonds, known as gilts, fell across the board. Two-year bond yields fell 9 basis points as 10-year gold yield fell 7 basis points.

UK headline inflation has fallen from a peak of 11.1% in October 2022 to 1.7% in September.

“These figures offer reassurance that the UK has entered a more moderate inflation environment, helped by lower fuel prices,” Suren Thiru, economic director at the Institute of Chartered Accountants of England and Wales, said in a note. with the “notable drop” in services inflation, indicating that “underlying pressures on prices are becoming less harsh.”

However, Thiru added that British inflation could reverse its decline in October due to an increase in the energy price cap set by regulators, while the BOE will wait to assess the UK Labor government’s long-awaited first budget. at the end of the month to detect possible changes. inflationary impact before setting a course.

Capital Economics UK chief economist Paul Dales was equally cautious, noting that much of the unexpected weakness in core and services inflation was due to a big drop in ticket price increases. air. As a result, the BOE is slightly more likely to stick to 25 basis point cuts every two meetings, Dales said, even if the possibility of two more reductions this year has increased.

“We continue to think rates will eventually fall to 3.00%, which is lower than the 3.50-3.75% quoted in the market,” he said.

However, Deutsche Bank’s UK chief economist Sanjay Raja said the inflation figures would be “music to the [Monetary Policy Committee’s] ears” and could lead them to consider a more rapid reversal of restrictive policy, including sequential rate cuts.

Raja also noted the risk posed by the budget, which he said “is likely to be expansionary despite the scale of fiscal consolidation that will occur on October 30.”