UK inflation lower than expected at 4% as Bank of England eyes rate cuts – business live | Business

Nobody appears to be dissenting that UK inflation and interest rates are both headed downwards in the coming months.

Simon French, chief economist at Panmure Gordon, an investment bank, has not seen anything from the latest data to go against that:

Indeed, the “softening” of core inflation is the most important number from January’s inflation figures, he argues.

Julian Jessop, an economist affiliated with the Institue of Economic Affairs, a right-wing thinktank, said that retail discounts in homeware and furniture shops may have been at play:

Lydia Prieg, head of economics at the New Economics Foundation, a left-wing thinktank, said the Bank of England should switch its focus from fighting inflation to fighting to support the UK economy.

It looks like the prospect of lower interest rates has helped UK housebuilder stocks, as demand for new housing is helped by cheaper borrowing costs.

Persimmon is the second-biggest riser on the FTSE 100, up 3%, while Taylor Wimpey has gained 1.9%.

Let’s take a look at what financial markets are saying on the prospects for UK interest rates.

The below table shows the likelihood of interest rate moves at each meeting of the Bank of England’s monetary policy committee – according to the bets of financial traders. It shows that in May traders think there is a one-in-four chance of a rate cut.

However, in June that rises to a 55.7% chance of a rate cut. And by December markets are pricing in almost three rate cuts.

If the Bank goes through with three cuts that would leave interest rates at 4.5% by the end of the year, down from 5.25% now.

Mild UK inflation supports interest rate cuts in May, say economists

The FTSE 100 has opened up 0.5%, possibly helped by a weaker pound after the inflation data.

London’s blue-chip index has also been helped by strong figures from Coca-Cola Hellenic Bottling Company, a distributor of the soft drink which is up 5% in the opening trades.

Across Europe it has been a less rousing start to the trading day. Here are the opening snap reports on stock markets, via Reuters:

• EUROPE’S STOXX 600 FLAT

• FRANCE’S CAC 40 DOWN 0.2%, SPAIN’S IBEX UP 0.2%

• EURO STOXX INDEX DOWN 0.1%

• EURO ZONE BLUE CHIPS DOWN 0.2%

• GERMANY’S DA FLAT

The weaker pound appears to be helping prospects for the FTSE 100 companies, which make the bulk of their earnings in other currencies.

FTSE 100 futures suggest the index will gain 0.5% when they open in about 15 minutes’ time.

The Bank of England is gearing up to cut interest rates. That would generally be expected to push up inflation, so Bank governor Andrew Bailey would be in a tricky position if headline inflation were rising.

As it is, financial markets are looking more comfortable with the idea that several cuts in the main lending rate, bank rate, are on the way.

UK interest rate futures show that markets have increased their bets on rate cuts during 2024. They imply that rates will fall by 0.71 percentage points during 2024, up from 0.58% before the data, according to Reuters.

Bank rate is at 5.25%, so that would suggest nearly three interest rate cuts during 2024 (assuming each cut is 0.25 percentage points).

Jeremy Hunt may not be the only person feeling somewhat relieved this morning: for the Bank of England it will likely forestall criticisms of its monetary policy stance.

The reaction on financial markets suggests that may be the case: sterling has dipped by 0.14% against the US dollar and 0.2% against the euro. That move usually suggests a bet on lower rates (which are less attractive for investors able to move their money all over the world in search of better returns).

Here is the graph showing the move in sterling as the lower-than-expected inflation reading came in:

The political reaction to the inflation reading has started.

Here is what chancellor Jeremy Hunt had to say:

Inflation never falls in a perfect straight line, but the plan is working; we have made huge progress in bringing inflation down from 11%, and the Bank of England forecast that it will fall to around 2% in a matter of months.

Rachel Reeves, Labour’s shadow chancellor, said:

After 14 years of economic failure working people are worse off. Prices are still rising in the shops, with the average households’ costs up £110 a week compared to before the last election. Inflation is still higher than the Bank of England’s target and millions of families are struggling with the cost of living.

The Conservatives cannot fix the economy because they are the reason it is broken. It’s time for change. Only Labour has a long-term plan to get Britain’s future back by delivering more jobs, more investment and cheaper bills.

We usually quote inflation as an annual number, but the monthly reading also suggests the downward trajectory: on a monthly basis, the consumer price index (CPI) fell by 0.6% in January.

The core measure of CPI also remained unchanged in January, at 5.1% annually. And that was lower than the 5.2% expected by economists. The core measure ignores volatile energy, food, alcohol and tobacco to try to get a more accurate picture of underlying inflationary pressures.

The headline inflation reading supports the interpretation (see opening post) that price pressures are easing in the UK.

Here is the ONS’s graph showing that trajectory, starting in 2014. Inflation spiked in 2022 after Russia’s full-scale invasion rocked global energy markets, before falling back as those increases faded.

Rising energy prices – after Great Britain’s energy regulator raised the price cap – were the main reason that inflation stayed at 4%, according to the UK’s Office for National Statistics (ONS).

But it was furniture and household goods that prevented the expected increase.

It said:

The largest upward contribution to the monthly change in both CPIH and CPI annual rates came from housing and household services (principally higher gas and electricity charges), while the largest downward contribution came from furniture and household goods, and food and non-alcoholic beverages.

UK inflation stays flat at 4% in January

UK inflation expected to rise, say economists