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UK inflation unexpectedly held steady at 3.8 per cent in September, sparking a rally in gilts as traders bet the Bank of England will cut interest rates again this year to boost lacklustre economic growth.
Wednesday’s figure from the Office for National Statistics was below the 4 per cent expected by the BoE and economists polled by Reuters. Lower prices for food and non-alcoholic beverages constrained September’s reading, the ONS said.
The data was released as the BoE’s Monetary Policy Committee attempts to bring inflation back towards its 2 per cent target without choking off growth. In August, the BoE forecast that inflation would peak at 4 per cent in September.
Economists said September’s reading might signal a peak for inflation following a recent resurgence led by higher food prices, as well as the effect of an increase in employer national insurance contributions.
The figure prompted traders to lift bets on a rate cut at the MPC’s December meeting to more than 70 per cent, up from 40 per cent, according to levels implied by the swaps market. Bets on a reduction next month climbed to about 40 per cent, from 14 per cent before the data.
The yield on the two-year gilt, which is sensitive to interest rate expectations and moves inversely to price, dropped 0.11 percentage points to 3.75 per cent on Wednesday, its lowest level for more than a year. The yield on the 10-year gilt dropped 0.09 percentage points to 4.39 per cent.
Rob Wood, UK economist at Pantheon Macroeconomics, a consultancy, said the ONS report was “a significant release for the MPC and raises the chance of a December interest rate cut”, adding that “September was likely the peak in this inflation hump”.
The BoE, which has cut interest rate five times since August last year, has spent months contending with sluggish growth and stubborn price pressures.
Services inflation, closely watched by the BoE’s rate setters as a measure of underlying price pressures in the economy, held steady at 4.7 per cent in September, below the BoE’s 5 per cent forecast.
Food and drink inflation eased to 4.5 per cent, down from 5.1 per cent in August and the first slowing in the annual rate in half a year. Inflationary pressures were also held back by an 8.6 per cent drop in prices for live music events, compared with an increase of 5.8 per cent a year ago.
George Buckley, an economist at Nomura, said the BoE would be encouraged by food prices given “the MPC thinks this is a potentially important driver of inflation expectations”.
Separate ONS statistics showed private rents increased 5.5 per cent in the 12 months to September, down from a 5.7 per cent rate in August.
In a sign of how still-high inflation has ratcheted up the political pressure on the government to cut the cost of living, chancellor Rachel Reeves has vowed to take measures in November’s Budget to bring down prices.
Responding to Wednesday’s data, Reeves said she was “not satisfied with these numbers”, adding that “for too long, our economy has felt stuck, with people feeling like they are putting in more and getting less out”.
Economists said the pace of further cuts would also depend on the Budget on November 26, with the prospect of steep tax increases and spending cuts potentially opening the path for additional reductions.
James Smith, an economist at ING, predicted the BoE would want confirmation that there would be a “material fiscal tightening” before lowering rates again.
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