UK inflation falls below expectations in September adding to BoE rate cut bets
The latest inflation data from the UK, which shows a sharp drop in both headline and core inflation, is setting the stage for potential interest rate cuts by the Bank of England (BoE). Annual consumer price inflation fell to 1.7% in September, down from 2.2% in August, marking the lowest level since April 2021. This decline, driven by falling airfares and petrol prices, was lower than market expectations of 1.9%. Core inflation, which strips out volatile items like energy and food, also eased to 3.2% from 3.6% in August. Importantly, services inflation, a key domestic price pressure indicator for the BoE, fell to 4.9%, below expectations and the lowest since May 2022.
This significant easing in inflationary pressures increases the likelihood of interest rate cuts, with investors now pricing in a 90% chance of two quarter-point cuts by the BoE by the end of the year. The sharp drop in services inflation is especially noteworthy, as the BoE had not anticipated it falling below 5% in 2023. Lower inflation figures provide some relief to the government, especially ahead of finance minister Rachel Reeves’ first budget.
Despite the current positive inflation outlook, some economists caution that inflation may rebound due to rising oil prices linked to the Middle East conflict and upcoming domestic energy price increases. However, with a softening labor market and continued easing of underlying inflation, the BoE is expected to proceed with rate cuts, maintaining a focus on supporting economic growth.