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Business

UK inflation slows sharply, boosting BoE and PM Sunak

Nature

  • UK inflation falls to 4.6% in October, lower than expected
  • The BoE and economists forecast a result of 4.8%
  • Core and services inflation also falls
  • Data reinforces idea that rate cuts could follow in 2024
  • Sunak says pledge to halve inflation now fulfilled

LONDON, Nov 15 (Reuters) – British inflation slowed more than expected in October, thanks to lower domestic energy prices compared to last year and a broader easing of pressures on price, which came as a relief to the Bank of England and Prime Minister Rishi Sunak.

Annual consumer price inflation plunged to a lower-than-expected 4.6% from 6.7% in September, official data showed. The rise is the smallest in two years and has prompted investors to bet more on a BoE rate cut next year.

“Now that we are starting to win the battle against inflation, we can move on to the next stage of our economic plan, namely the long-term growth of the UK economy,” said Finance Minister Jeremy Hunt.

He is expected to offer investment incentives to businesses in a budget update on November 22.

BoE forecasts and the consensus of a Reuters poll of economists pointed to a rate of 4.8% for the month of October.

The ONS said the fall in the annual CPI rate was the biggest month-on-month since April 1992.

Sterling fell slightly against the dollar after the release of the data, which showed that key inflation measures closely watched by the BoE were also slowing more than expected. The FTSE 100 rose more than 1% to its highest level in almost a month. The mid-cap FTSE 250 index has hit its highest level in two months.

Although inflation has more than halved from its peak of 11.1% in October 2022, the BoE has warned that the “last mile” to bring it down will be more difficult. The central bank projects that inflation will not return to its 2% target until the end of 2025, although many economists say that will happen sooner.

As the UK economy stagnates, inflation figures have reinforced expectations that the BoE’s hiking cycle is over, with the US Federal Reserve and European Central Bank also appearing to have reached peak interest rates .

“The UK economy still faces stagflation and, in our view, the road ahead is likely to remain bumpy,” said Julien Lafargue, chief market strategist at Barclays Private Bank, who predicts no change in BoE rate before a few months.

Core inflation, which does not take into account energy and food prices, fell to 5.7% from 6.1%, while services sector inflation also fell more than what the central bank had forecast, at 6.6% compared to 6.9%.

SUNAK CLAIMS VICTORY

The data represents rare welcome news for Sunak, who had promised to halve price growth this year ahead of an election due in 2024 that opinion polls show his Conservative party is likely to lose.

People shop at Borough Market in London, Britain July 19, 2023. REUTERS/Anna Gordon/File photo acquire license rights

“In January, I made halving inflation this year my top priority. Today we have delivered on that commitment,” Sunak said on social media platform X.

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The National Institute for Economic and Social Research, a think tank, said interest rate hikes from the BoE and changes in energy prices were the reasons for the decline, adding that it It was not up to the government to control inflation.

“It would therefore be useful to move away from this halving target and return towards the (BoE’s) 2% target,” NIESR said.

Despite the sharp fall in inflation last month, Britain still has the highest rate of consumer price growth among the Group of Seven countries, just above France’s 4.5%. Italy is expected to release an updated estimate for October on Wednesday.

BAD FILE

Consumer prices in Britain have risen 21% since the end of 2020, a record as bad as in Western Europe.

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Reuters Charts

U.S. inflation data on Tuesday also came in weaker than expected, triggering a surge in government bond prices and sending other major global currencies higher against the U.S. dollar, including the British pound.

BoE chief economist Huw Pill said on Tuesday that the expected drop in inflation to just under 5% would still leave it “far too high”.

The BoE has sought to emphasize that it is far from being close to cutting interest rates from their 15-year high, even as the economy edges closer to a recession.

“The case against any further rate hikes is becoming clearer, but much more evidence will be needed before rate cuts can start to be considered,” said Hugh Gimber, global markets strategist at JP Morgan Asset Management.

“Tightness in the labor market remains the main concern.”

Investors have increased their bets on BoE rate cuts next year with three 25 basis point cuts to the bank rate almost fully priced in by December 2024, and a first cut fully seen in June.

Reporting by Andy Bruce and David Milliken, art by Sumanta Sen, editing by William James, Bernadette Baum and Catherine Evans

Our Standards: The Thomson Reuters Trust Principles.

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