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UK inflation unexpectedly held steady at 3.8 per cent in September as food prices eased, prompting traders to increase bets that the Bank of England will cut interest rates again this year to support lacklustre economic growth.
Wednesday’s figure from the Office for National Statistics was below the 4 per cent expected by the BoE and economists polled by Reuters. Price pressures were constrained by lower prices for food and non-alcoholic beverages, as well as decreases in live music prices, the ONS said.
The data was released as the BoE’s Monetary Policy Committee attempts to bring inflation back towards its 2 per cent target without choking off economic growth.
Economists said September’s reading might signal a peak for inflation following a recent resurgence led by higher food prices as well as the effect of an increase in employer national insurance contributions.
Following the release of the figures, traders lifted bets on a rate cut at the MPC’s December meeting to more than 60 per cent, up from 40 per cent, according to levels implied by the swaps market. Bets on a cut next month climbed to about 35 per cent, from 14 per cent before the data.
The yield on the two-year gilt, which is sensitive to interest rate expectations and moves inversely to price, dropped 0.08 percentage points to 3.77 per cent in morning trading on Wednesday.
“Widespread downside surprises across the CPI components makes this a significant release for the MPC and raises the chance of a December interest rate cut,” said Rob Wood, UK economist at Pantheon, a consultancy. “September was likely the peak in this inflation hump.”
Wednesday’s ONS report showed services inflation, closely watched by the BoE’s rate setters as a measure of underlying price pressures in the economy, held steady at 4.7 per cent in September, below the 5 per cent rate predicted by the BoE.
Chancellor Rachel Reeves has vowed to take measures in November’s Budget to curb inflation in an attempt to clear the way for further BoE rate cuts. The Bank has lowered interest rates five times since August last year.
Responding to Wednesday’s data, Reeves said she was “not satisfied with these numbers”, adding that “for too long, our economy has felt stuck, with people feeling like they are putting in more and getting less out”.
Economists said that the pace of further cuts would also depend on the Budget on November 26, with the prospect of steep tax increases and spending cuts potentially opening the path for additional reductions.
James Smith, an economist at ING, predicted the BoE would want confirmation that there will be a “material fiscal tightening” before lowering rates again.
The economy grew 0.3 per cent in the three months to August, official figures last week showed, unchanged from the second quarter but down from 0.7 per cent in the first quarter.
