Inflation Retreats to 4.6%
Consumer price inflation in the UK slowed to 4.6% in October, below forecasts of 4.8% and a significant decline from September’s 6.7%, according to the Office for National Statistics. Core inflation, excluding energy and food prices, also saw a decrease.
The developments have caught the attention of the Bank of England’s rate setters, leading to growing expectations of potential rate cuts.
Market Speculation and BoE Predictions
The softer inflation figures have fueled market speculation, with increasing bets on the Bank of England implementing up to three rate cuts next year.
Analysts note evidence of a loosening jobs market, diminishing wage growth, and weaker economic output as factors contributing to the growing likelihood of rate adjustments.
Analyst Insights: Positive News for the Economy
Financial analysts view the deceleration in inflation as positive news for the broader economy. The Monetary Policy Committee’s decision to maintain interest rates at 5.25% is justified by the latest inflation figures, which are 0.3 percentage points below the MPC’s August forecast.
Forecasts anticipate inflation remaining at current levels for the remainder of the year, with a potential further decrease in the first half of 2024.
BoE’s Response and Rate Cut Expectations
While a third consecutive pause is expected at the BoE’s December meeting, inflation remains above the target of 2%. Analysts caution that sustained higher inflation may necessitate interest rates to stay in ‘restrictive territory.’
Despite Governor Andrew Bailey emphasizing that it is premature to consider rate cuts, market pricing indicates expectations of three base rate cuts in 2024, starting in May.
Wage Growth and Economic Outlook
Evidence of slowing UK wage growth in the third quarter, standing at 7.7% before bonuses, has contributed to expectations of impending interest rate cuts.
Although wage growth surpasses consumer price inflation, the softer economic outlook and a weakening labor market suggest that the BoE’s base rate hiking cycle might be impacting the desired targets.
Challenges for the BoE and Economic Projections
The persistence of pay growth raises concerns for the BoE, indicating potential challenges in curbing inflation.
A combination of easing wages and a softening labor market is seen as a signal for the BoE to exercise patience in achieving normalized levels of wage growth and inflation. However, forecasts anticipate potential rate cuts in the third quarter of 2024.
Market Dynamics and BoE Rate Cut Forecast
Despite Governor Bailey’s stance, market dynamics suggest a different narrative, with Pantheon Macroeconomics data indicating pricing for three base rate cuts in 2024.
Pantheon forecasts predict a weaker UK economy, faster inflation decline, and higher unemployment than the BoE’s expectations, intensifying the call for rate adjustments.
Private Sector Pay and Future Projections
Analysts point to private sector pay, which remained unchanged in September, as a critical factor. The slowing rate of growth in the most recent three-month period is seen as a trend likely to continue.
Projections indicate private sector wage growth reaching 4 to 4.5% by next summer, potentially serving as a catalyst for rate cuts beginning in August.