UK inflation figures suggest BoE may be close to bringing interest rate hiking cycle to an end

Another 25bps rise remains on the table for tomorrow, but the path is now open for a pause at November's meeting

By Stuart Cole | @Stuart Cole | 20 September 2023


A better set of inflation figures for the UK this morning, relatively speaking. Although the headline rate remains over three times higher than its official target, today's fall from 6.8% to 6.7%, going against expectations for an increase to 7.0%, has raised hopes that the impact of the BoE’s monetary policy tightening is finally starting to take the steam out of pricing pressures. Importantly for the BoE, the annual core rate also printed a significant drop, from 6.9% to 6.2%. Encouragingly, the easing in CPI was broad based, with most categories showing reductions, the only significant upwards pressures coming from transport costs and household services, with the rising price of oil a key factor here, something the BoE has no control over.

Going forward, headline CPI is expected to show a modest increase next month as the impact of higher global oil prices feed through. But thereafter it should resume its decent, aided by a significant boost to the downside in October when the further 7% reduction in the default energy price tariff most UK households pay for their gas and electricity supplies will be felt. Furthermore, producer prices are also pointing to slowing consumer goods prices going forward. Food producer output price inflation fell to 5.1% in August from 6.5% in July, pointing to the potential for food CPI inflation to show a sharp fall from August’s 13.6% rate. And in a similar vein, the 1.5% rate of core producer output price inflation in August was substantially lower that the 5.2% rate of core goods CPI inflation, suggesting considerable scope for the latter to move lower as well. And, possibly of most importance for the BoE, falling energy costs for businesses and the prospect of slower wages growth as the labour market weakens, suggests services CPI inflation will also continue heading lower, a category that has so far shown remarkable resilience to the impact of the BoE’s monetary tightening. However, it is not all good news. Despite the better numbers today, inflation remains significantly above target, with worries over the UK growth outlook - including the on-going risk of recession – meaning that the risk of a period of stagflation can still not be ruled out.

Today’s numbers will see expectations raised that the BoE may pause in its rate hiking cycle tomorrow. However, on balance, a further 25bps still appears to be the most likely outcome as it tries to ensure that CPI remains on a downwards trajectory. Having got the ‘transitory’ inflation argument so wrong, it will not want to risk making another such error with inflation this time around. Accordingly, another rate rise tomorrow still looks likely to be delivered, an outcome that will do nothing to assuage the above fears of stagflation. But today’s numbers support the case for more neutral language to accompany the hike, potentially laying the groundwork for a pause in the tightening cycle to be delivered at the next meeting in November.

The reaction in sterling to today's numbers shows how unexpected they were to the markets, and in the current climate it is hard to see where any material support for the pound is going to emanate from. Further rises in interest rates are unlikely to offer any strength, as they will simply exaggerate fears of recession, while suggestions from the BoE tomorrow that we have now reached, or are very close to reaching, the end of the tightening cycle will remove any support the pound was receiving from the potential for higher rates. As such, sterling may well find itself to be the biggest loser from today’s better inflation prints.