"With UK growth flatlining in June and July, and the Federal Reserve looking set to reduce US interest rates today, the Bank of England may well follow suit at their rate setting meeting tomorrow."
- Ian Stewart, chief economist at Deloitte
UK inflation was unchanged at 2.2% in August, in line with market expectations but below the Bank of England's forecast of 2.4%, leaving industry experts divided on the future path of Bank Rate.
Markets are currently pricing in a 25% chance of another cut tomorrow and a total of 50bps by the end of this year.
After hitting the Bank of England's 2.0% target in May and June, rising inflation - including core inflation which rose to 3.6% - has caused many economists to predict a hold in interest rates at tomorrow's Monetary Policy Committee meeting. They also noted that the decision to cut last month was finely balanced at 5-4 in favour.
"The Bank will want to stay in 'wait and see' mode"
Luke Bartholomew, deputy chief economist at abrdn, commented: “It is hard to see this inflation report changing many minds at the Bank of England, with the data coming in pretty much exactly as expected. Certainly the fact that headline inflation is a touch above target will come as no surprise to policymakers. Of greater focus will be the fact that various measures of underlying inflation are still quite elevated. That helps explains why the Bank of England is likely to be somewhat more cautious than the US Federal Reserve in its easing cycle over the next few months. Indeed, the Bank of England now looks extremely likely to keep rates on hold tomorrow with the next cut probably coming in November.”
Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, said: The decision to cut interest rates in August was a very close call, and Bank Governor Andrew Bailey has emphasised the importance of not cutting rates too much or too fast. Though economic activity is slowing ever so slightly, today’s figures suggest that the Bank will not be in a hurry to pursue back-to-back policy easing.”
Rob Morgan, chief investment analyst at Charles Stanley Direct, added: "Price rises rarely subside in a straight line, and the bigger picture remains intact: Inflation is heading in the right direction. Yet it is not doing so at a pace that would encourage the Bank of England to act hurriedly.
"Inflation previously returning to target over the summer offered a window of opportunity for the BoE to reduce interest rates, and a slim majority of MPC members opted for a cut on 1st August. However, with wage inflation remaining on the high side, feeding into services costs, and a reacceleration of energy prices it looks most unlikely the BoE will move to cut interest rates at its next meeting tomorrow.
"Instead, a move lower in November is still very much on the cards. By this stage the data may well show a further moderation in inflation and wage pressures, plus any ramifications from the Budget on 30th October can be considered. It may be that a fiscally tight Budget further tips the scales towards a loosening of monetary policy. For now, the BoE will want to stay in ‘wait and see’ mode."
"We could see another rate cut before long"
However, others believe that we could still see a rate cut in the near future.
Neil Rudge, chief banking officer at Shawbrook, said: "The pause in price growth is welcome news for businesses. It boosts the likelihood of further base rate cuts, whether that happens tomorrow or later this year. It also reaffirms that last month’s rate cut — the first since 2021 — was the right move."
David Hollingworth, associate director at L&C Mortgages, commented: “Inflation holding steady at a rate of 2.2% may sound underwhelming but is likely to be viewed positively. It was in line with forecasts so shouldn’t create any waves in what the market expects, and the Bank of England has already signalled that it expects inflation to rise as the year progresses.
"So, although above the target rate of 2%, today’s stable figure shouldn’t alter the expectations that we could see another rate cut before long."
Nathan Emerson, CEO at Propertymark, said: “The positive news from today’s figures is that inflation remains broadly in line with the Bank of England’s target of two per cent, which means that people shouldn’t witness the uncertainty and rapid price rises experienced in 2022 and 2023. Although a further drop in inflation would have of course been welcome news, Propertymark hopes the Bank of England feels in a strong enough position to consider a further cut in interest rates when they meet tomorrow."
Ian Stewart, chief economist at Deloitte, added: “The big picture in the UK is of receding inflation pressures. While core inflation nudged higher in August, softer wage growth and falling commodity prices suggest that this will reverse in coming months.
“With UK growth flatlining in June and July, and the Federal Reserve looking set to reduce US interest rates today, the Bank of England may well follow suit at their rate setting meeting tomorrow.”
