Steady inflation sees markets step up bets on Christmas rate cut   – Mortgage Strategy

Money markets have ramped up bets on the chances of the Bank of England cutting the base rate before Christmas after inflation again held steady yesterday.  

Traders are now pricing in a 70% chance of a 25 basis points cut to Bank rate to 3.75% from 4% by the Bank’s Monetary Policy Committee at its 6 November meeting, or more likely its 18 December gathering.  

This compares with around a 33% chance of a reduction before official inflation figures were released on Wednesday. 

This data saw the cost of living unexpectedly held at 3.8% for the third month in a row in September, as upward pressure from petrol prices was offset by falls in live music prices and cheaper food bills. 

Forecasters, including the Bank of England, had widely expected inflation to hit 4%, driven by regulated energy prices and airfares. 

Inflation at that level would have been double the central bank’s 2% target. 

Deutsche Bank chief UK economist Sanjay Raja says rate-setters could decide to reduce Bank rate as early as next month after “inflation now sits a healthy amount below the Bank’s projections”. 

Raja adds that the MPC may wait to see if pay rises continue to fall below 5% before cutting. 

The latest official figures show average wage growth was 4.7% in the three months to August, down from 4.8% over the three months to July.    

But Raja says: “For now, with two additional inflation prints to watch, and two further labour market reports to come before the December meeting, we think there will be enough ammunition for the MPC to ease rates further.” 

Centre for Economics and Business Research Economist Dan Smith adds: “With August’s data suggesting further loosening in the labour market, and hints of household support in the upcoming November Budget, the case for a rate cut in November is strong, but lingering price pressures complicate the decision.  

“Cebr still expects one further interest rate cut before the end of the year.” 

All of this comes after the MPC voted 7–2 last month to maintain Bank rate at 4%, with external members Alan Taylor and Swati Dhingra pressing to cut the interest rate by a quarter point to 3.75%.   

Bank chief economist and MPC member Huw Pill last week warned that high services prices and wages had made inflation much more “sticky”. 

Others argue that rate-setters are unlikely to cut Bank rate before Chancellor Rachel Reeves presents her 26 November Budget, to see how any tax rises she pushes through are forecast to affect growth and inflation. 

Finova customer success director Matt Harrison says: “Rachel Reeves has warned that her Budget has required some ‘tough decisions’, but it’s crucial now that offsetting measures are introduced to avoid further inflationary damage from whatever tax amendments the Budget is due to trigger.” 

EY ITEM Club chief economic advisor Matt Swannell says: “Although both headline and services inflation undershot the Bank’s forecast, the MPC will likely need to see a little more progress before a majority will be willing to vote for further rate cuts.  

“Therefore, while it’s likely to be a closer call than previously thought, we continue to think the MPC will leave Bank rate unchanged in November.” 

However, after inflation holding steady for three consecutive months, more economists see an outside chance of a rate cut that they had not seen at the start of the week. 

Goldman Sachs economist James Moberly says: “While our baseline remains that the next Bank cut will come in February, the downside surprise on headline inflation increases the risks of an earlier cut in the fourth quarter of this year.”