UK inflation unchanged, rate cut unlikely

Key takeaways from August inflation data

• General CPI was 2.2%
• Core inflation rose to 3.6%
• Overall CPI peaked at 11.1% in 2022
• The Bank of England’s target is 2%

What has changed in UK inflation data?

In terms of the consumer price index (CPI) components, higher fares were offset by lower fuel prices and moderate price increases in restaurants and hotels, the ONS said. More precisely, the statistical body highlighted an increase in air fares to European destinations. While airfares are typically higher during the summer, the monthly increase was the second largest since 2001.

In a note, Morningstar European market strategist Michael Field says the UK’s headline rate of inflation is now under control. However, the rise in core inflation “lends weight to the argument that the Bank of England will pause interest rate cuts on Thursday”. That will give it room to take a closer look at today’s data, as well as the impact of August’s quarter-point rate cut. Last month, the Bank cut interest rates from 5.25% to 5%, with five members of the Bank’s nine-strong monetary policy committee (MPC) backing the first cut of 2020.

Ahead of the release of CPI data for August, financial markets—measured by overnight index swaps—assigned a 75% chance of maintaining the rate and a 25% chance of a reduction, although this latter percentage has increased recently. Many experts believe a cut is unlikely, especially given these latest data, but such a move cannot be completely ruled out.

After all, the Bank has surprised the markets before. In December 2021, as it made its initial efforts to contain a rise in inflation in the real economy, the MPC voted for a 0.15 percentage point increase in the base rate to 0.25%.

The bank will likely hold rates tomorrow

Daniel Mahoney, UK economist at Handelsbanken, expects the voting pattern to shift in Thursday’s decision in favor of retention as MPC members weigh “the persistence of inflation”.

“We therefore believe that most MPC members will support a rate freeze tomorrow, on the basis that they will want to see further evidence of disinflation before voting to continue the rate cut cycle,” he said in a note .

He adds that the November meeting, when the Bank will publish its monetary policy report and hold a press conference, is the next likely date for an interest rate cut.

There is no rate decision in October, but there is Labour’s first budget on October 30, so the new government’s tax and spending plans could have an impact on growth and inflation forecasts for next year. There is much debate about what the Budget will mean for personal finances, particularly around capital gains tax and pensions.

After that, the Bank of England’s last meeting of the year is just before the Christmas break in December. The focus will then shift to predicting the rate trajectory for 2025. Interest rate cuts have been much slower than markets and experts expected at the start of the year, but this has been the same in the US and the eurozone. Global markets are now concerned about the size of the Federal Reserve’s tapering on Wednesday night and whether this will herald a rapid cycle of rate cuts.

Daniel Casali, chief investment strategist at Wealth Manager Evelyn Partners, believes that while the BoE has cut ahead of the Fed, it will lag its US counterpart with future moves:

“The broader downward trend in UK inflation should encourage the BoE to cut interest rates this year, but at a relatively slower pace compared to the US,” he said in a note.

Inflation in the UK peaked above 11% in 2022 and has fallen sharply since then. Bank of England interest rates increased from 0.1% in December 2021 to 5.25% in August 2023.