Veriton Investment

Traders See BOE Cut This Year After Inflation Holds Steady

(Bloomberg) -- UK inflation unexpectedly held steady in September after food bills fell for the first time in 16 months, prompting a surge in market bets on a Bank of England interest-rate cut before the end of the year.

Consumer prices rose 3.8% from a year earlier, the same pace as in the previous month, the Office for National Statistics said on Wednesday. It was below the 4% economists and the BOE were expecting with only one forecaster surveyed by Bloomberg predicting unchanged inflation.

Most Read from Bloomberg

Pritzker Slams Chicago Mayor’s Plan for Tax on Big Payrolls

MTA to Sell $230 Million of Debt Amid Tolling Plan Legal Fight

What Comes After the ‘War on Cars’?

Cruise Ships Show South Korea’s Struggle to Host Global Leaders

The ONS said upward pressure from auto fuel prices was offset by falls in live music prices and cheaper food bills, which dropped for the first time since May 2024. Services inflation, which the BOE is watching closely for signs of domestic price pressures, was unchanged at 4.7%.

While the figures still show inflation at almost double the BOE’s 2% target, they may further ease concerns about lingering price pressures in the wake of downbeat data on the economy and jobs market.

Although traders still see a rate cut next month as unlikely, they added to bets on one before Christmas, putting the odds at around 70%. Before the data, the chance of a reduction by December was just over one-in-three. The pound reversed gains, falling 0.3% to $1.3333 against the dollar. Gilts jumped in early trading, led by shorter maturities that are more sensitive to monetary policy. The two-year yield fell as much as 10 basis points to 3.75%, the lowest since Aug. 2024.

“While inflation still running at close to double the Bank’s 2% target is an uncomfortable position for policymakers, September’s reading is likely to give the Bank some reassurance that the UK’s inflation problem is not as chronic as feared,” said Martin Beck, chief economist at WPI Strategy. “More importantly, it probably marks the peak of the recent inflation upswing.”

What Bloomberg Economics Says...

“The miss in September’s headline CPI inflation has lifted the odds of a Bank of England rate cut this year. Services inflation came in below its forecast and details suggest that underlying price pressures have eased. Still, we are sticking to our view that the central bank will only resume its easing cycle in 2026. Headline inflation remains elevated and, with inflation expectations rising, we think the BOE will want it to be running closer to its 2% target before it eases policy again.”

—Ana Andrade, economist. Click to read the REACT on the Terminal

Chancellor of the Exchequer Rachel Reeves has promised to deliver fiscal plans that help contain inflation at the budget on Nov. 26, hinting that she will tackle pressures from rises in regulated prices.

The latest inflation reading brings some relief for Reeves at a time when she is seeking savings to put the public finances back on track. September CPI is used to uprate working-age benefit payments, with the increase taking effect in April the following year. Those benefits — which cost £123 billion ($164 billion) in 2024-25, about 10% of all government spending — will rise by less than economists had expected.

The data are also a boost for households who have been squeezed by more expensive food and energy bills, with September widely seen as a high-water mark for an inflation rate that has jumped from 1.7% a year ago. Price pressures are now expected to steadily subside.

Explainer: Why UK Inflation Is So High and Tough to Bring Down

The BOE is unlikely to cut rates at its meeting next month, coming just weeks before the government’s crucial budget. However, the odds of a move in December have edged higher after Governor Andrew Bailey last week pointed to weakness in the labor market and gross domestic product data painted a stagnant picture of the economy. Policymakers have been watching food prices closely given their salience for consumers’ inflation expectations.

The central bank’s rate-setting panel is currently divided between hawks concerned that elevated inflation expectations could trigger a feedback loop, and more dovish officials who are putting more emphasis on a weakening economy and jobs market. Bailey has taken a balanced stance, saying the timing of the next move is uncertain.

In a potential warning sign, however, separate figures showed inflationary pressures continuing to build further down the pipeline, driven by higher food prices. The price of goods leaving factory gates rose 3.4% from a year earlier, accelerating from 3.1% in August. Producer input prices meanwhile rose 0.8%, up from 0.2%.

Tomasz Wieladek, chief European economist at T. Rowe Price, also warned “the good news may not last,” citing a 28.8% month-on-month fall in air fares - the third largest drop since 2001. It is a volatile item and “will very likely rebound next month.” He added that a significant fall in the prices of music events is unlikely “to be a persistent source of inflation.”

--With assistance from Joel Rinneby, Harumi Ichikura, Mark Evans and Alice Gledhill.

(Updates markets)