The Bank of England will cut rates twice more this year, according to traders, who on Wednesday upped wagers on the amount of additional easing expected from the bank after an encouraging inflation report out of the UK.
Headline price growth was 2.2% last month, ONS said. That was up from the prior month’s 12-month rate but remember: The headline YoY pace is expected to drift higher through Q1 of next year before receding back to, and eventually below, target.
Consensus was looking for 2.3% from Wednesday’s headline. Crucially, core price growth was 3.3%, the slowest since September of 2021.
The figure above shows you the breakdown. It’s very favorable for policymakers. Goods prices are still in deflation, so the “pickup” there isn’t really a “pickup,” and services price growth decelerated meaningfully.
That latter point (about services inflation) is absolutely critical in the UK. It’s critical everywhere, but especially there. The BoE’s reservations about cutting rates (reflected in the “finely balanced” 5-4 split decision to cut at the August MPC) center mostly around still-elevated services inflation. If that series begins to look more favorable, it’ll help bring reluctant MPC members around.
At 5.2%, services inflation in the UK last month was the slowest in over two years. The 0.5ppt MoM drop in the 12-month rate was the largest since late last summer.
Obviously, 5.2% is still far too brisk, but to say the BoE will take it (i.e., take any good news they can get when it comes to services inflation) would be to understate the case. Any decline’s welcome. A half-point drop counts as a “Praise Jebus” (to quote Homer Simpson) print. For context, the BoE expected 5.6%.
To be sure, Wednesday’s release doesn’t put September in play for a second rate cut. Or not in my view anyway. Maybe it makes sense to price next month’s meeting at ~20%, but no more than that. Bailey barely got the votes he needed for this month’s cut. He’s not going to have them for a follow-up move a mere seven weeks later.
That said, November and December are squarely in play. Whatever they think they’re betting on, traders wagering on 50bps over the balance of the year will probably need to get it from those two meetings.
In any case, when taken with another favorable inflation report out of the US, the read-through for markets was pretty constructive. Inflation’s receding and central banks have carte blanche to cut.
