City bets Bank of England will pause interest rates again as inflation stays flat

  • CPI held at 6.7% in September thanks to higher services inflation 
  • Sterling rallies but futures markets suggest year-end rate peak of 5.25%
  • However, Bank of England could consider more hikes next year  

Inflation failed to fall again in September – but analysts do not think stubborn cost pressures will push the Bank of England into another interest rate hike next month.

Consumer price inflation was flat on the previous month at 6.7 per cent, higher than forecasts of 6.6 per cent, as easing food and goods price pressures were offset by higher energy costs, data from the Office for National Statistics shows today.

It follows the decision made the BoE’s last Monetary Policy Committee meeting in September, when the bank brought an end to 14 consecutive rate hikes with a pause at 5.25 per cent.

Food for thought: Stickier than expected inflation keeps BoE Governor Andrew Bailey guessing

Food for thought: Stickier than expected inflation keeps BoE Governor Andrew Bailey guessing 

Rate hikes have driven the cost of borrowing much higher, impacting economic growth, and weighing on consumers, business and government, but they are yet to bring inflation back to the BoE’s target of 2 per cent.

In response to the hotter-than-expected inflation print, the pound rallied this morning, reversing losses driven by yesterday’s wage growth figures – suggesting foreign exchange markets are getting more cautious of another BoE rate hike.

Rob Morgan, chief investment analyst at Charles Stanley, said: ‘There are two more interest rate announcements to come this year on 2 November and 14 December.

‘Despite wage growth remaining robust and a bump higher in fuel prices, on balance it looks likely the BoE will continue to pause rates for the time being to consider more economic and inflation data.

‘Today’s inflation reading will provide some discomfort that a further turn of the interest rate screw will be required.’

Flat: Inflation has remained at 6.7% in both August and September

Flat: Inflation has remained at 6.7% in both August and September

But developed markets economist at ING James Smith said there is ‘not much’ in today’s inflation data likely ‘to pressure the Bank of England into resuming its rate hike cycle’.

The BoE has been focused on British services inflation – a key driver of overall inflationary pressures this year – and will have been disappointed to see it move from 6.8 per cent to 6.9 per cent in September.

But Smith said ‘volatile package holidays’ prices, which are included in services data, ‘seems to have done a lot of the leg work there’, and services inflation remains below the BoE’s projection of 7 per cent in August.

He added: ‘We still think services inflation should start to come lower through the remainder of the year, perhaps ending 2023 at 6 per cent. That’s not a huge improvement admittedly, but would echo survey evidence which suggests fewer firms are raising prices and those that are have been lifting them less aggressively.

‘For headline inflation, of course, October will see another step lower as last year’s steep increase in household energy bills drops out of the annual comparison.

‘With neither yesterday’s wage data nor today’s services inflation data containing any earth-shattering surprises, we think the Bank will be content with keeping rates on hold again in November.’

As of this morning, futures market pricing indicates Britain will end 2023 with an interest rate peak roughly ten basis points higher – suggesting another pause in November at 5.25 per cent.

Janet Mui, head of market analysis at RBC Brewin Dolphin, said: ‘The fact that wage growth is slowing and more concrete signs that the labour market is loosening should give the Bank of England solace that underlying inflation pressure is on track to ease. 

‘The report slightly raises the chance that the Bank of England will raise interest rates again by the end of the year, but the markets broadly think the Bank is done hiking.’ 

However, senior personal finance analyst at Interactive Investor Myron Jobson cautioned that while interest rates ‘might not need to go up further for the time being’, it is not necessarily the end of the hiking cycle.

He said: ‘Bank of England policymakers are likely to keep the door open to additional rate rise until they can be more confident that they have a handle on rising prices.’

The Bank of England paused its interest rate hiking cycle in September at 5.25%

The Bank of England paused its interest rate hiking cycle in September at 5.25%

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