Britain’s high inflation rate has unexpectedly slowed, according to ONS figures released today. It immediately raised the prospect of the Bank of England pausing its long run of interest rates rises.
The pound fell and investors saw a nearly 50-50 chance of rates staying on hold at the BoE’s September meeting after the consumer price index sank to an 18-month low of 6.7% in August, a slight drop from July’s 6.8% but one welcomed by many finance sectors.
George Lagarias, Chief Economist at Mazars said this indicated that inflation “is on the mend”, given that the figure came on the heels of a significant upward revision to growth.
“While current high rates may continue to reduce economic activity, slowing inflation means that the central bank may unshackle the economy quicker than previously anticipated,” he said.
Rachel Winter, Partner at Killik & Co, said the figures will “further encourage investors who have been buoyed by a sense that markets are signalling a return to normalcy”.
She added: “Steadier prices will allow both companies and investors to adopt longer-term strategies which should strengthen confidence and markets in the coming months.
“However, whilst macroeconomic conditions in the UK and also the US may be improving, the situation is not so clear in China, whose disappointing recovery and struggling property sector continue to worry investors who are exposed to the region. While the West has been battling to bring down its high inflation, China has been suffering from the opposite problem of deflation. This is indicative of a lack of demand in the Chinse economy.
“Options are plentiful for investors at the moment, with a host of attractive options on the table. Fixed-income products continue to offer strong returns in this era of higher interest rates. One particular area of opportunity lies in the short-dated gilts market, where many gilts are trading at a noticeable discount to par value. This is attractive because there is no capital gains tax on gilts.”
given the persistence and strength of service sector inflation and wage growth, this unexpected drop today has significantly raised the odds of the central bank pausing
And Douglas Grant, Group CEO of Manx Financial Group PLC, felt that, amid concerns that the Bank of England may be encouraged to again raise interest rates, today’s unexpected fall in CPI inflation was “positive news”.
He said: “The business sector is not out of the woods yet and as SMEs account for around half of all private sector turnover in the UK, we need more innovative measures to ensure their survival. It is more important than ever that SMEs take this as a reminder to review their existing lending structures and ensure they remain ahead of the storm.”
Dr Arun Singh, Global Chief Economist, Dun & Bradstreet said: “While it’s great to see that the Bank of England’s measures are continuing to lower inflation, this surprise drop in headline inflation implies businesses should remain cautious – particularly since global crude oil prices are rising rapidly, which could lead to higher fuel costs and another rise in inflation in coming months.
“While it still seems likely that the BoE will raise rates, given the persistence and strength of service sector inflation and wage growth, this unexpected drop today has significantly raised the odds of the central bank pausing. Should the BoE move to raise interest rates, we will be looking for signals that it is ready to hold rates for an extended period of time.
“What remains clear is that the UK is still facing a turbulent economy. Earlier this year we found that only 27% of companies rated their business extremely resilient during turbulent times and 85% of business leaders are not utilising data to understand disruption in their ecosystem.
“Businesses are going to have to continue to focus on how they can remain resilient, productive and competitive as the UK economy cautiously navigates itself out of this rocky period. This is where quality data insights can provide a competitive advantage and bolster business resilience.”
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