Money markets have increased bets on the possibility of the Bank of England cutting its base interest rate before Christmas after inflation remained stable again yesterday.
Traders currently expect the Bank of England’s Monetary Policy Committee to cut interest rates by 25 basis points from 4% to 3.75% at its meeting on November 6 (more likely December 18), with a 70% chance.
By comparison, ahead of Wednesday’s official inflation data, the chance of a rate cut was about 33%.
The data showed the cost of living unexpectedly held at 3.8% for a third consecutive month in September, as upward pressure on gas prices was offset by lower prices for live music and lower food costs.
Forecasters including the Bank of England generally expect inflation to hit 4%, driven by regulations on energy prices and air ticket prices.
Inflation at this level would be twice the central bank’s 2% target.
Sanjay Raja, chief UK economist at Deutsche Bank, said rate setters could decide to cut bank rates as early as next month because “current inflation levels are well below the central bank’s forecasts”.
Raja added that the Monetary Policy Committee may first observe whether the salary increase continues to be below 5% before cutting wages.
The latest official data showed average wage growth in the three months to August was 4.7%, down from 4.8% in the three months to July.
But Raja said: “With two more inflation reports to watch now and two more labor market reports ahead of the December meeting, we think the MPC will have enough ammunition to ease rates further.”
Dan Smith, economist at the Center for Economics and Business Research, added: “With August data pointing to further easing in the labor market and the upcoming November budget hinting at household support, the case for a rate cut in November is strong, but lingering price pressures complicate decision-making.
“CEBR still expects further rate cuts before the end of the year.”
All this comes after the Monetary Policy Committee voted 7-2 last month Keep bank interest rates unchanged at 4%outside members Alan Taylor and Swati Dhingra urged a quarter-point cut to 3.75%.
Huw Pill, the central bank’s chief economist and member of the monetary policy committee, warned last week that high service prices and wages were making inflation more “sticky”.
Others believe rate setters are unlikely to cut central bank rates before Chancellor Rachel Reeves delivers her Nov. 26 budget to see how any tax increases she pushes for are expected to affect growth and inflation.
Matt Harrison, client success director at Finova, said: “Rachel Reeves has warned that her Budget will require some ‘tough decisions’, but it is now vital that offsetting measures are put in place to avoid further inflationary damage from any tax amendments triggered by the Budget.”
Matt Swannell, chief economic adviser at EY ITEM Club, said: “While both headline and services inflation are below the Bank’s forecasts, the Monetary Policy Committee may need to see more progress before a majority is willing to vote for further interest rate cuts.
“So while this may be closer than previously thought, we still think the MPC will keep Bank Rate on hold in November.”
However, after inflation remained stable for three consecutive months, more economists see outside opportunities for rate cuts that they did not see at the start of the week.
“While our baseline remains that the next central bank rate cut will occur in February, the unexpected downside in headline inflation increases the risk of an early rate cut in the fourth quarter of this year,” said Goldman Sachs economist James Moberly.
