16th Oct 2024 10:33
(Alliance News) - Softer than expected UK inflation figures increases the chances of back-to-back interest rate cuts in November and December, economists on Wednesday said.
According to the Office for National Statistics annual consumer price index inflation in the UK rose by 1.7% in September, down from 2.2% in August.
This was short of the 1.9% rise that had been expected by FXStreet-cited market consensus and the lowest figure in more than three years.
It also was below the 2.1% forecast by the Bank of England's in its August Monetary Policy Report.
The ONS said the largest downward contributions to monthly CPI came from transport, with larger negative contributions from air fares and motor fuels.
On a monthly basis, prices were little changed in September, down from a rise of 0.5% in September 2023. Prices rose 0.3% in August, and fell 0.2% in July.
Significantly, services inflation decelerated to 4.9% in September from 5.6% in August, undershooting consensus expectations of 5.2% and well below the BoE's August MPR forecast of 5.5%.
Goldman Sachs explained the drop in services inflation was in "large part driven by weakness in airfares, although underlying services inflation measures also decelerated on a year-on-year basis."
Barclays agreed noting across the various measures of underlying services inflation that have been referenced by the BoE, all saw an easing in the year-on-year inflation rates.
This "will give comfort to the MPC that the easing today is not purely an artefact of volatile components," the broker added.
The deceleration in services saw core inflation fall by more than expected to 3.2% in September from 3.6% in August, well below consensus expectations of 3.4%.
The ONS said transport costs fell by 2.4% in the year to September, compared with a rise of 1.2% in the year to August. This is the largest annual price fall since October 2015.
The ONS said although air fares usually fall in September from August, the 35% drop in the air fare index was the fifth largest since the monthly collection of prices began in 2001.
It was a lower rate than the 23% fall in monthly price in September 2023.
The report also noted the average price of petrol fell by 5.5 pence per litre between August and September. This resulted in overall fuel prices falling by 10.4% in the year to September, compared with a fall of 3.4% in the year to August.
Deutsche Bank Chief Economist Sanjay Raja said today’s inflation data should be "music to the [Monetary Policy Committee's] ears."
"Inflation momentum is slowing," he noted, while services prices, "once deemed too sticky in the UK are coming off faster than expected."
Raja feels the case for sequential rate cuts is rising and believes the MPC can start to contemplate a faster dial of restrictive policy.
"Risks are skewed to a faster drop in bank rate over the next 6 to 9 months," he thinks.
However, Raja cautioned the looming budget is likely to be expansionary despite the scale of fiscal consolidation coming on October 30.
"The MPC will want to weigh the full effects of fiscal policy, which can tone down the case for more ‘forceful’ rate cuts in the near-term," he suggested.
Simon French at Panmure Liberum agreed.
"We will wait until we see the content of the budget before reviewing our view for a single [fourth quarter] UK cut - but expect the interest rate-sensitive sectors (real estate/ construction) to go better today on this data."
On London's FTSE 100, housebuilders Barratt Redrow PLC rose 2.8%, Taylor Wimpey climbed 2.4% and Persimmon advanced 2.2%.
Property firm Land Securities firmed 1.3%.
French noted the data showed "big downside misses" to the BoE's September inflation forecasts to both core inflation and headline CPI putting November and December both "in play" for back-to-back interest rate cuts.
Goldman Sachs said it continues to expect the BoE to cut in sequential 25bp steps from the November meeting."
Barclays agreed. "In its totality, today's data add to our conviction that the BoE will move to sequential cuts from November."
James Smith at ING also took this view.
Smith noted the inflation data is "by some distance, the most important input into the BoE’s decision-making process, as it tries to gauge the level of inflation "persistence" in the economy."
"The important thing here is that the BoE had been forecasting September services inflation up at 5.5%, so the fact that it’s down at 4.9% marks a sizeable undershoot. August’s figure was 5.6%."
Smith expects this latest undershoot on services inflation to continue, suggesting it could fall as low as 4.5% by the end of the year.
"If we’re right, then we think the Bank of England can pick up the pace of cuts beyond November. We expect a cut in December and at every meeting until rates reach 3.25% next summer."
Sterling fell sharply following the data. Against the dollar, the pound traded at USD1.3029 on Wednesday morning compared to USD1.3094 at the time of the London close on Tuesday.
Matthew Ryan at Ebury thinks the data now effectively "guarantees" another interest rate cut from the MPC at its next meeting in November, with a 25 basis point move more than 90% priced in by swap markets.
"Indeed, we now see a heightened possibility that both the vote is unanimous, and that the bank strikes a more dovish tone in its communications that hints at faster cuts ahead. Markets are already preparing for such an eventuality, and now see a three-in-four chance of back-to-back rate reductions in November and December."
By Jeremy Cutler, Alliance News reporter
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