Surprise Inflation Dip Rattles Financial Markets
In an unforeseen turn of events, the British pound experienced a significant drop to a ten-month low, while stock markets surged in response to a sudden decline in inflation. The Office for National Statistics (ONS) released a report that caught the financial sector off guard, indicating a decrease in inflation from 6.8 percent in July to 6.7 percent in August.
Pound’s Plunge and Market Rally
The unexpected inflation figures sent shockwaves through the financial sector, defying previous forecasts that suggested inflation would climb to 7 percent or even higher. The implications of this surprise development have put the Bank of England’s decision on interest rates in a precarious position.
- Sterling plummeted to as low as $1.2335 and €1.1549.
- Gilt yields, a crucial indicator of government borrowing costs, also saw a decline.
Simultaneously, housebuilders and commercial property developers led the stock market to impressive gains. The FTSE 100 saw a rise of 0.9 percent, reaching 7731.65, while the FTSE 250 surged by 1.6 percent, reaching 18,712.37. High Street retailers also experienced notable movements, with hopes that the financial pressure on families may soon ease.
Expert Opinions Vary on Bank of England’s Next Move
Goldman Sachs has predicted that the Bank’s Monetary Policy Committee (MPC) will leave rates unchanged at 5.25 percent in their upcoming decision. They noted, “We now expect the MPC to keep the bank rate unchanged and lower our forecast for the terminal policy rate to 5.25 percent from 5.5 percent.” George Buckley, an economist at Nomura, concurred, stating, “Now, we anticipate no change in pricing. Policy is constrictive, and now inflation and the economy are reacting to it. The moment seems right for pausing.”
However, some experts suggest that a rate hike to 5.5 percent may still be in the cards. Paul Dales, Chief UK Economist at Capital Economics, explained, “The Bank will probably raise rates to 5.5 percent tomorrow despite the surprise drops in inflation. But, it confirms our assertion that this was the final walk..”
Market Winners and a Positive Outlook
Among the notable winners in the stock market were housebuilders, with Crest Nicholson gaining 5.8 percent, Taylor Wimpey rising 5.6 percent, Barratt Developments climbing 4.7 percent, Bellway leaping 5 percent, and Persimmon surging 5.1 percent. Property developers British Land and Land Securities also posted impressive gains. Budget retailer B&M and B&Q-owner Kingfisher witnessed significant increases as well.
Russ Mould, Investment Director at AJ Bell, emphasised, “The idea that interest rates don’t need to be raised further, or at least not significantly more, is supported by less inflation. Retailers and firms involved in the real estate industry would benefit from that, as consumers would, in principle, no longer be under additional financial strain.”
Attempts by the Bank of England to Control Inflation
The Bank of England has steadily raised rates from 0.1 percent to 5.25 percent since December 2021 in an attempt to rein in inflation. Despite the recent decline from a peak of 11.1 percent in October of the previous year to 6.7 percent last month, inflation still remains more than three times above the 2 percent target.
Until yesterday, the Bank was widely expected to raise rates to 5.5 percent today, with financial markets suggesting an 80 percent chance of such a move. However, as of last night, those odds have dwindled to approximately 50-50.
The fall in core inflation, excluding food and energy prices, from 6.9 percent to 6.2 percent, has been seen as a particularly welcome sign of easing price pressures. Additionally, the drop in inflation within the services sector, with prices in August 6.8 percent higher than a year earlier (down from a 7.4 percent increase in July), has added to the positive outlook.
Nevertheless, experts remain cautious, as the oil price remains a “key risk” to the economic outlook, with oil recently hitting a ten-month high above $95 a barrel, impacting fuel costs for motorists and airlines.