UK inflation numbers point to end of BoE rate hiking cycle
The fallout from the UK CPI numbers today has very much mirrored the market reaction to yesterday’s readings from the US, ie that the interest rate hiking cycle in the UK is now similarly seen as having ended. After the disappointing prints seen last month, the Bank of England (BoE) will be breathing a sigh of relief today that the monetary tightening it has delivered to date is having a more significant dampening effect on inflationary pressures, although it will be keen to stress that the battle has not yet been won, particularly given the annual core rate which, at 5.7%, remains significantly above target.
The headline rate, falling from 6.7% to 4.6%, was given a particular downwards boost from falling gas and electricity prices, although the concern will be that the rise in wholesale energy prices currently being seen is pointing to that fall being fully reversed as soon as January. But the BoE will be hopeful that the continued easing being seen in food prices will go some way towards alleviating these higher prices, and with other categories in the CPI basket continuing to exhibit easing pricing pressures, so the headline rate should continue to fall, if a little less rapidly. Furthermore, yesterday’s labour market data suggested that firms are taking the opportunity to capitalise on falling prices and the growing slack being seen in the labour market to slow down the rate of increase in wages, which will have a direct impact in dampening aggregate demand, discouraging firms from raising prices beyond the absolute minimum they need to.
On a broader note, the UK figures today are the latest set of numbers that are increasingly seeing the market believe that the current hiking cycle being pursued by most central banks around the world has now ended, the narrative now moving on to when we might start to see the first cuts delivered. For the UK the first cut is now seen by June 2024, although having got the ‘transitory’ inflation argument so wrong the BoE will be focused on making sure that its message of “higher for longer” continues to resonate. It will not want the market to start unwinding some of the monetary tightening it has delivered to date by getting unduly optimistic about the prospect of rate cuts. Inflation remains considerably above target still and the BoE has warned more than once that the most difficult part of the journey in returning it back to target will be the “last mile”. As such, today’s numbers are unlikely to shift the BoE’s stance in any meaningful way. It also needs to be remembered that the BoE is simultaneously undergoing a credibility rebuilding exercise and as such will likely prefer to overtighten policy rather than risk easing too soon.
For the markets, the developments of the past 24 hours suggests that we may start to see a fundamental shift in the investment landscape, with renewed interest being seen to invest in stocks and bonds at the expense of alternative asset classes such as gold.
Today’s numbers, while welcome, are unlikely to shift the BoE’s stance in any meaningful way. The BoE is undergoing a credibility rebuilding exercise as well as trying to return CPI to target and as such will likely prefer to overtighten policy rather than risk easing too soon.