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

The UK’s 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. According to data released by the Office for National Statistics, the UK’s Consumer Price Index (CPI) rose by 2.2% year-on-year in August, which was the same as the previous value and lower than the Bank of England’s expectations.

The data showed downward pressure from motor fuels was offset by an increase in air ticket prices. This development could keep the Bank of England on track to ease monetary policy further later this year. The Bank of England cut interest rates by 25 basis points on August 1, the first rate cut since the beginning of 2020, on the grounds that underlying inflation has eased.

A key indicator closely watched by the Bank of England, the services industry CPI in August, rose 5.6% year-on-year, higher than the market consensus of 5.5% and the previous value of 5.2%. However, the market generally expects this recovery to 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 benchmark interest 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 to cut interest rates 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 economic growth and a budget hike in taxes. Strategists at investment banks such as Goldman Sachs, HSBC, and UBS also agree with this view, believing that policymakers will soon be forced to step up their response as UK economic growth continues to weaken.