Traders are now betting that the likelihood of the Bank of England cutting interest rates tomorrow has diminished after services inflation rose from 5.2% to 5.6%.
Money markets suggest a 14% chance that the Monetary Policy Committee will lower borrowing costs, down from 25% before the inflation figures are released. However, traders still anticipate two additional rate cuts by the end of the year, albeit by a smaller margin.
Suren Thiru, economics director at ICAEW, stated:
“These figures indicate that inflation is in a challenging phase, as stronger price pressures in the services sector have kept the headline rate frustratingly above the Bank of England’s 2% target in August. The trajectory for UK inflation for the rest of the year appears largely set, with increased demand from a growing economy and rising energy bills in October likely pushing inflation modestly upward.
While the rise in services inflation highlights a key obstacle to maintaining the headline rate consistently at or below target, the ongoing squeeze on wages should support a more definite downward trend.
An interest rate cut on Thursday now seems unlikely, as most members of the Monetary Policy Committee are likely to prefer evaluating the impact of next month’s budget before deciding when to ease policy again.”
