UK Inflation Rate Remains Above 2% Target, Leaving Room for Further Interest Rate Cuts

The UK inflation rate remained slightly above the Bank of England’s 2% target in August, leaving room for the Bank of England to further cut interest rates later this year. Data released by the UK National Statistics Office on Wednesday showed that the UK CPI rose 2.2% year-on-year in August, the same as the previous value and lower than the Bank of England’s expectations.

The data is likely to keep the Bank of England on track to further ease monetary policy later this year. The Bank of England cut interest rates by 25 basis points on August 1, the first rate cut since early 2020, citing easing underlying inflation. The Bank of England also released a signal of further cautious rate cuts in the future.

The CPI for the services sector, a key indicator closely watched by the Bank of England, rose 5.6% year-on-year in August, higher than the market’s general expectation of 5.5% and the previous value of 5.2%. However, the market generally expects that this rebound will be temporary.

The Bank of England will announce its September interest rate decision on Thursday. While the Bank of England is expected to keep its base rate unchanged at 5%, market expectations for further easing have been rising. Traders currently expect the Bank of England to cut interest rates in both November and December, and five more times in 2025.

Fund managers at Abrdn Investment Management Ltd., Aviva Investors and Allianz Global Investors are betting that the Bank of England’s tentative rate cuts won’t last long amid slowing growth and a budget for higher taxes. Strategists at Goldman Sachs, HSBC and UBS agree, arguing that policymakers will soon be forced to step up their response as Britain’s economic growth continues to weaken.