Newsflash: City investors are raising their bets that the Bank of England could cut interest rates in September.
The money markets now indicate that there’s a 45% chance that Bank Rate is cut to 4.75% next month, from its current level of 5%, and a 55% chance that borrowing costs are unchanged.
That follows this morning’s data showing that inflation rose by less than expected in July, to 2.2% – below City forecasts of 2.3%.
Before this morning’s data, a September rate cut was only a 36% probability, according to City pricing.
Traders also now expect two rate cuts by the end of this year – previously, only one cut was fully ‘priced in’, with a second seen as likely.
As flagged at 7.11am, the BoE will be reassured that service sector inflation slowed last month, to 5.2%:
Capital Economics explains:
Importantly for the Bank of England, the decline in services inflation from 5.7% to 5.2% was much bigger than anyone anticipated. That was well below the 5.6% rate forecast by the Bank in August, although closer to our own forecast of 5.4%.
However, Aaron Hussein, global market strategist at J.P. Morgan Asset Management , suggests the Bank is unlikely to cut in September:
‘Today’s inflation print will reassure members of the committee that voted for a rate cut last month that they may finally be taming the inflation beast. While headline inflation ticked up as favourable base effects fade, services inflation – a crucial measure of domestically generated inflationary pressure – moderated. This coupled with moderating wage growth, suggests that inflation may finally be heading in the right direction.’
‘However, with economic growth on a cyclical upswing since the start of the and the labour market remaining resilient, their remains a risk that cutting too quickly will fan the inflation flames. We therefore think it’s unlikely that the Bank will follow up its August cut with a cut in September. Absent any material shock to growth, this cutting cycle is likely to be gradual with a quarterly cadence most likely.
Investors banking on imminent rate cuts will therefore be disappointed.’
Over in the eurozone, we have confirmation that its economic growth remained steady this spring.
Eurozone GDP rose by 0.3% in April-June, statistics body Eurostat reports, which confirms the ‘flash’ estimate released at the end of July.
That follows 0.3% growth in January-March, after stagnation in the second half of last year.
France grew by 0.3%, while Germany’s GDP fell by 0.1% – putting the eurozone’s largest member on the brink of recession.
Although City traders have raised their bets on a UK interest rate cut next month, there aren’t many economists predicting a cut as early as September.
ING developed markets economist, James Smith, predicts there will be two more interest rate cuts by Christmas, but probably later in the year than September:
He says the Bank of England will take a closee look at the slowdown in services inflation in July:
On the face of it, that looks like very welcome news which in theory, you might expect could speed up the process of lowering rates. Remember that services inflation is the main guiding light for Bank of England policy these days. But dig into the details and we suspect the Bank will be taking these figures with a pinch of salt.
“Much of this looked like noise and the BoE itself concluded that these upside surprises didn’t tell it much about the trajectory of inflation over the medium-term. Indeed, we replicated a measure of “core services” inflation, put together by the Bank of England, which excludes various items like rents and airfares, and we additionally took out hotels given the recent volatility. Back in June, this measure showed that services inflation had fallen back more aggressively than the headline metric, once those components were removed.
“Our metric of core services inflation was unchanged at 5.1%. In other words, just as the upside surprises of recent months looked like noise, it’s only fair to conclude that the same is true of this latest sharp fall in services inflation as well. We suspect that’s the conclusion the Bank is likely to reach too. That said, we still think the news on services inflation is likely to gradually improve as the year wears on. Surveys show firms are raising prices much less aggressively than they were. And that should help unlock at least one rate cut in November, and we suspect another in December. We suspect the Bank will pause at the next meeting in September.”
The smaller-than-expected rise in UK inflation in July could calm jitters over whether the Bank of England was right to cut interest rates at the start of this month.
Anthony Codling, analyst at RBC Capital Markets, told clients:
CPI in July was higher than in June, but lower than expected, which may comfort those who were nervous about the Bank Rate cut earlier this month.
We believe that the scene is set for further cuts in Bank Rate before the year is out and that falling mortgage rates will usher in a robust autumn selling season once the summer holidays draw to a close.
UK house price inflation was unchanged in June, while tenants continued to be hit by rising rents.
New data from the ONS shows that UK house prices increased by 2.7%, to £288,000, in the 12 months to June 2024, matching the level in the year to May.
Average house prices increased in England to £305,000 (2.4%), in Wales to £216,000 (1.8%), and in Scotland to £192,000 (4.3%).
But rents are rising at a faster rate. Average price rents jumped by 8.6% in the year to July, which also matches June’s data.
Average rents increased to £1,319 (8.6%) in England, £748 (7.9%) in Wales, and £965 (8.2%) in Scotland, in the 12 months to July 2024, the ONS reports.
In England, rents inflation was highest in London (9.7%) and lowest in the North East (6.1%), in the 12 months to July 2024.
Today’s inflation data could mean that UK rail fares rise by 3.6% next year… but the government insists no decision has been made yet.
Annual rail fares have historically been based on July’s change in the Retail Price Index – a rather discredited inflation measure, which has lost its status as an accredited official statistic.
RPI rose by 3.6% in the year to July, the Office for National Statistics reported this morning.
The Government is planning to announce fare rises later this year, and a Department for Transport spokesman has said that the government wants to make prices ‘as affordable as possible’.
“The Transport Secretary is delivering the biggest overhaul of our railways in a generation, to provide better services for passengers, while saving millions of pounds in fees paid to the private sector.
“No decisions have been made on next year’s rail fares but our aim is that prices are as affordable as possible for passengers.”
Nearly half the fares on Britain’s railways are regulated by the Westminster, Scottish and Welsh Governments, including season tickets on most commuter journeys, some off-peak return tickets on long-distance routes, and flexible tickets for travel around major cities.
Train operators set rises in unregulated fares, although these are likely to be very close to changes in regulated ticket prices.
Seperately in the rail industry, there are hopes that a deal will be struck today betweenn the train drivers’ union, Aslef, and the government, to end long-running strike action.
Today’s inflation figures showed the cost-of-living crisis had not ended, points out Liberal Democrat Treasury spokeswoman Sarah Olney:
“Today’s figures are a stark reminder that the cost-of-living crisis is far from over. Years of Conservative chaos have devastated families up and down the country as countless people are still paying the price of Conservative mismanagement.
“From mortgage payments and rail fares to the cost of food in supermarkets people are feeling a hangover from hell all thanks to successive Conservative prime ministers.
“The Government needs to tackle the cost-of-living crisis head-on, starting by investing in our farmers to bring down food prices, saving families money by expanding free school meals to all children in poverty and implementing a one-year freeze to rail fares.”
Shadow chancellor Jeremy Hunt says today’s inflation figures showed more needed to be done to keep prices under control.
Under Hunt’s stewardship of the economy, inflation soared to 11% before falling back, as the economy was buffered by the surge in energy costs.
Today, he offers his successor, Rachel Reeves, some advice:
“Today’s figures show how important it is that the new Labour Government follows the path of the previous Conservative government and focus on keeping inflation low.
“In government, we took the difficult decisions to reduce inflation from 11.1% to the Bank of England’s target of 2.0% – paving the way for the first interest rate cut in four years.
“However, there is clearly more to be done to keep inflation down.
“The Chancellor must not use this data as an excuse to break her promises and hike up taxes – tax rises she had planned all along.”
I’m reminded of this rather fine cartoon from March, by the brilliant Ella Baron:
Monica George Michail, associate economist at the NIESR, reckons the Bank of England will show ‘some caution’ about cutting interest rates soon:
“Today’s small rise in inflation is driven mostly due to the large price drops in gas and electricity last year falling out of the calculation. This will be a consistent feature over the next few months, with inflation hovering around the 2 per cent target, before coming back to target in early 2025.
On the other hand, underlying inflationary dynamics continued to slow with core inflation at 3.3 per cent and services inflation at 5.2 per cent. Despite the lower figures, these remain elevated and may lead the Bank of England to exercise some caution with regards to further interest rate cuts.”
The price of hotels saw a monthly fall of 6.4% in July, compared with a rise of 8.2% a year earlier, the ONS reports.
That pulled the annual inflation rate for UK accommodation services down to 3.9% in July from 9.8%.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, suggestsrecent pop star tours are a factor influencing hotel costs:
The Taylor Swift effect also appears to have a slight hand in these figures, as the main downwards pressure on inflation was a fall in hotel room costs from June, when she was on her UK tour.
Pop star Pink’s UK appearances also saw spikes in prices in some cities in June. It now seems more unlikely that the surge-pricing effect will turn into a recurrent inflationary pressure, as it clearly depends on the brightness of the stars.
Hotel prices had jumped by 8.8% in June – a month in which Swift held seven concerts in the UK on her Eras Tour. She plays five dates at Wembley later this month.
Darren Jones, chief secretary to the Treasury, has responded to the rise in inflation, saying:
“The new Government is under no illusion as to the scale of the challenge we have inherited, with many families still struggling with the cost of living.
“That is why we are taking the tough decisions now to fix the foundations of our economy so we can rebuild Britain and make every part of the country better off.”
Two more UK interest rate cuts this year are possible, agrees Pierre Roke, associate at Validus Risk Management, after this morning’s inflation report:
“After bottoming out at 2% over May and June, UK inflation, as expected, is back on the rise – coming in at 2.2%.
“Following the Bank of England’s narrow 5-4 vote to deliver their first cut, the market has been hanging on each announcement and data point for guidance on future rate cuts. This heightened attention is evident in the one-month GBPUSD volatility, which has surged to 6.75%, nearing year-to-date highs. However, since stating they would remain data dependant, the BoE have been radio silent, leaving the market only with economic data to gauge next steps.“Today, markets had a keen interest in services inflation – after two consecutive months of hotter-than-expected readings at 5.7%, the hawkish Bank of England committee members, who voted to hold, highlighted this as a critical factor, making it a key market signal. Today’s 5.2% print vs 5.5% expected print validates the more dovish committee members and potentially leaving room for not just one more cut this year but two.”
The pound has taken a knock from this morning’s inflation data, as bets increased slightly on further rate cuts this year.
Sterling dropped by a third of a cent to $1.2825, down from $1.2858 just before 7am.
Newsflash: City investors are raising their bets that the Bank of England could cut interest rates in September.
The money markets now indicate that there’s a 45% chance that Bank Rate is cut to 4.75% next month, from its current level of 5%, and a 55% chance that borrowing costs are unchanged.
That follows this morning’s data showing that inflation rose by less than expected in July, to 2.2% – below City forecasts of 2.3%.
Before this morning’s data, a September rate cut was only a 36% probability, according to City pricing.
Traders also now expect two rate cuts by the end of this year – previously, only one cut was fully ‘priced in’, with a second seen as likely.
As flagged at 7.11am, the BoE will be reassured that service sector inflation slowed last month, to 5.2%:
Capital Economics explains:
Importantly for the Bank of England, the decline in services inflation from 5.7% to 5.2% was much bigger than anyone anticipated. That was well below the 5.6% rate forecast by the Bank in August, although closer to our own forecast of 5.4%.
However, Aaron Hussein, global market strategist at J.P. Morgan Asset Management , suggests the Bank is unlikely to cut in September:
‘Today’s inflation print will reassure members of the committee that voted for a rate cut last month that they may finally be taming the inflation beast. While headline inflation ticked up as favourable base effects fade, services inflation – a crucial measure of domestically generated inflationary pressure – moderated. This coupled with moderating wage growth, suggests that inflation may finally be heading in the right direction.’
‘However, with economic growth on a cyclical upswing since the start of the and the labour market remaining resilient, their remains a risk that cutting too quickly will fan the inflation flames. We therefore think it’s unlikely that the Bank will follow up its August cut with a cut in September. Absent any material shock to growth, this cutting cycle is likely to be gradual with a quarterly cadence most likely.
Investors banking on imminent rate cuts will therefore be disappointed.’
Here’s a breakdown of the various annual price changes that led to the UK’s inflation rate rising to 2.2% per year in July.
Food and non-alcoholic beverages: +1.5%
Alcohol and tobacco: +7.3%
Clothing and footwear: +2.1%
Housing and household services: -1.5%
Furniture and household goods: -1.7%
Health: +5.7%
Transport: +0.2%
Communication: +4.5%
Recreation and culture: +3.70%
Education: +4.5%
Restaurants and hotels: +4.9%
Miscellaneous goods and services: +3.5%
The inflation rate for food and non-alcoholic beverage prices remained at 1.5% per year in July.
That matches June’s reading, which was the joint lowest annual rate since October 2021.
But, this is the first time since March 2023 that the annual rate of food and drink inflation hasn’t fallen.
At its peak, the rate hit 19.2% in March 2023, when shortages of salad vegetables pushed up prices.
It’s important to remember that the falls in inflation we saw in the first half of 2024 did not mean that the cost of living was falling – simply that the prices of a basket of goods and services rose at a slower rate, compared with 12 months earlier.
And today’s inflation report has a graphic example of the surge in prices in the last few years – gas prices in July were around 68% higher than in March 2021. Electricity prices have gained 45% over that time.
Following this morning’s rise in the UK inflation rate to 2.2%, ONS chief economist Grant Fitzner says:
“Inflation ticked up a little in July as although domestic energy costs fell, they fell by less than a year ago.
“This was partially offset by hotel costs, which fell in July after strong growth in June.
“The increase in cost of goods leaving factories slowed a little in the year to July, led by falling petrol prices. Meanwhile, raw materials prices picked up for the first time in over a year, driven by smaller falls in gas and electricity costs.”