Bets on Bank of England to maintain rates at 5.25% after surprise inflation fall

The Bank of England is anticipated to maintain rates at 5.25% as consumer prices surpass predictions.

Investors are now less optimistic about an upcoming interest rate hike, foreseeing that the Bank of England might maintain the current borrowing rates due to an unexpected decrease in inflation.

Despite forecasts suggesting a rise, inflation descended to 6.7% in August. This has left the Bank of England’s rate decision finely balanced.

Experts had previously expected the inflation rate to climb from July’s figure of 6.8% to 7.1% due to surging petrol and diesel costs. However, a deceleration in food inflation and a decrease in hotel room prices meant that the overall consumer prices remained subdued.

For the upcoming policy meeting on Thursday, financial markets are estimating a 55% likelihood that the Bank of England will keep rates unchanged at 5.25%.

Leading economists, including those from Goldman Sachs, Nomura, and Deutsche Bank, have adjusted their outlook, now forecasting that the bank will remain inactive.

This mirrors the recent decision by the Federal Reserve on Wednesday, who decided against hiking interest rates, even though they were already at a 22-year peak.

The Federal Reserve decided to maintain the benchmark rate between 5.25% and 5.50%, though they signalled the potential for future increases.

The Fed noted that the US economy has been growing steadily, and unemployment figures continue to be favourable.

In the UK context, key inflation indicators showed a decline, concurrent with the drop in the primary rate.

Core inflation, which omits fluctuating costs like food and energy, including petrol, receded from 6.9% to 6.2%.

The Bank of England, keeping a vigilant eye on services inflation as an indicator of wage-driven price hikes, also noticed a reduction from 7.4% to 6.8%.

Sven Jari Stehn of Goldman Sachs commented, “Of the trio of indicators that the MPC uses to gauge inflation persistence, both labour market tightness and services inflation have displayed more progress than initially forecasted since the August meeting. Only wage growth continues to outpace expectations.”

“Taking into account the MPC’s recent remarks, which lean towards a more gradual peak in rates, our assessment is that the MPC will leave the Bank Rate as it is in the upcoming meeting.”

The prevailing sentiment among investors is that rate reductions might be on the horizon earlier than they had predicted. Market indicators hint at possible rate cuts as soon as March 2024, whereas initial estimates pointed to May 2024.

The potential for a gentler peak in rates and swifter reductions buoyed the housing sector stocks. In early trading, Taylor Wimpey was a front-runner in the FTSE 100, with shares climbing 5.25%. Close on its heels, Barratt Developments saw a robust increase of 4.14%.

The pound registered a slight dip of 0.2% against the dollar, positioning at $1.236.

Suren Thiru, the head of economics at the Institute of Chartered Accountants in England and Wales, opined that the data from the Office for National Statistics (ONS) indicates a “softening in core price pressures.”

He further elaborated, “Given the current trends, we anticipate inflation’s downward path to intensify in the upcoming months. Factors like decreasing energy costs, a slowing economy, and the deferred effects of interest rate hikes will likely bring the primary rate significantly down.”

Between July and August, petrol prices increased by over 5p per litre, settling at an average of 148.5p per litre. This is still lower than the 175.2p per litre that was the norm a year ago.

Given the recent surge of oil prices to $95 a barrel, there’s a likelihood of further price hikes. Goldman Sachs forecasts that oil could reach $100 a barrel in the upcoming year.

According to ONS data, in August, the prices of second-hand cars decreased by 0.5% compared to the previous year. Unexpectedly, airfare rates dropped from July to August, a trend last seen in 2020 due to the pandemic’s impact on global travel.

Food price inflation, though decelerating, remains elevated, with a 13.6% increase compared to August 2022. On the brighter side, some food items have become more affordable. For instance, milk is now 0.3% cheaper than last year, and butter prices have dropped by 3.2%.

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