The Bank of England’s (BoE) upcoming decision on whether to increase interest rates for the 15th consecutive time is hanging in the balance, particularly after the unexpected dip in inflation, as observed by economists.
Recent data from the Office for National Statistics (ONS) revealed that the consumer price index in August increased by 6.7%, a decline from July’s 6.8%, and notably lower than the anticipated 7.0% by the City and the BoE’s forecast of 7.1%.
When energy, food, alcohol, and tobacco are excluded, the core CPI went up by 6.2% year-on-year in August, down from July’s 6.9%, and less than the City’s projection of 6.8%. This decline is attributed to drops in prices for food, air travel, and accommodation, despite a surge in fuel costs.
This unexpected turn in inflation has sparked debates on whether the BoE might maintain the current interest rates.
Berenberg’s senior economist, Kallum Pickering, emphasized that the decision regarding interest rate hikes is very much uncertain. He noted that the overnight index swaps market, which recently reduced its predictions for the peak bank rate, has adjusted its odds on another 25 basis point rise to roughly a 50% chance from what seemed definite just a day prior. Nevertheless, Pickering opines that the authorities will likely lean towards a hike to 5.5%, while suggesting that future increases might be off the table if inflation continues its downward trend.
ING Economics’ James Smith shared, “Though we’re inclined to believe that the BoE will increase rates, it’s undoubtedly a tight race. Both salary and inflation stats hint that the ongoing tightening phase is nearing its culmination.”
However, Goldman Sachs has revised its stance post the unforeseen inflation numbers, now anticipating the BoE to hold steady on interest rates. Following the new data, Goldman has reduced its end-of-year inflation forecasts for both core and headline to 5.5% (previously 6.0%) and 4.4% (previously 4.7%) respectively.
Simon French, Panmure Gordon’s lead economist, regarded this as “crucial information for the MPC’s discussions, suggesting that keeping the rates steady this week may be an overlooked possibility.”
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