The Office for National Statistics (ONS) reported a YoY increase in UK headline inflation of 6.7% for September, remaining consistent with the previous month but exceeding the expected 6.6% figure. The MoM inflation rate also saw a slight increase from 0.3% to 0.5%. Core CPI inflation for September registered at 6.1% YoY, a slight decrease from the previous month’s 6.2%, but still above the anticipated 6.0% decline. The ONS has reported notable downward pressure on prices in several sectors, including restaurants and hotels, food and non-alcoholic beverages, recreation and culture, furniture, and household goods.
Francesco Pesole, an FX Strategist at ING Bank, noted that Sterling value has risen in response to these developments. Market participants are now factoring in a 50% probability of another rate hike before the end of the year. It is expected that the EUR/GBP currency pair may experience a temporary correction due to more hawkish Bank of England rate expectations, but the prevailing sentiment suggests an upward trajectory leading up to the Bank of England’s upcoming meeting.
The Pound’s response to the release of inflation data has been more of a modest rise than a significant surge. This is in line with historical patterns, as research from RBC Capital Markets has shown that Pound Sterling typically reacts more when inflation figures are unexpectedly lower. It’s worth noting that the possibility of another interest rate hike is not entirely ruled out. This is particularly due to the surprising increase in services inflation, which is closely monitored by the Bank of England, rising from 6.8% to 6.9%.
The most recent inflation data alone may not be sufficient to sway the Bank of England towards another rate hike in November, showing a cooling trend in wage pressures, which could potentially contribute to lower future inflation. The Pound experienced a decline against the majority of its counterparts. This has led to the observation that the market might have already adjusted its expectations ahead of the inflation release.
Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, anticipates that as energy costs decline for many businesses upon renewing their supplier contracts and labor availability improves, the pace of services price increases will continue to slow. Pantheon Macroeconomics predicts that consumer prices will rise gradually over the next few months, bringing the headline rate of CPI inflation to an average of 4.5% in Q4 and 4.0% in Q1.
Tombs suggests that if this scenario plays out, the Monetary Policy Committee may not need to maintain the Bank Rate at 5.25% for an extended period next year. The headline rate of CPI inflation is expected to hover between 2.0% and 3.0% for the remainder of 2024.
