UK inflation steady at 2.2% leaves door open for more rate cuts

UK INFLATION held at just above the Bank of England’s (BOE) 2 per cent target in August, leaving the door open to further interest-rate cuts later this year.

Consumer prices rose 2.2 per cent from a year earlier, the same pace as in July and undershooting the BOE’s forecast, the Office for National Statistics said on Wednesday (Sep 18). The reading was in line with the median expectation of economists surveyed by Bloomberg. Downward pressures from motor fuels were offset by an upward push from air fares.

The figures are likely to keep the BOE on track for a further loosening in policy later this year after it cut rates for the first time since the pandemic on Aug 1, citing easing underlying inflation.

Services inflation, a key gauge being watched closely by the BOE, rose to 5.6 per cent in August from 5.2 per cent in July. However, a pickup had been widely anticipated and is expected to prove temporary. Both services inflation and the headline rate are running below levels forecast by the BOE in August.

While policymakers are expected to leave rates unchanged at 5 per cent at their decision on Thursday, market expectations of further easing have been mounting. Traders are pricing in cuts for both November and December with five more to follow in 2025.

The BOE decision this week will be announced a day after the Federal Reserve is expected to kick off its own easing cycle amid fears about the health of the US economy. BLOOMBERG