Goldman Sachs now expects the Bank of England to leave rates on hold tomorrow after this morning’s surprise inflation reading.
The US investment bank said August’s downside surprise means the Monetary Policy Committee (MPC) will “keep [the] Bank Rate unchanged tomorrow”.
Inflation for August came in at 6.7 per cent, down slightly from the 6.8 per cent recorded in July. Most economists had predicted that rising fuel prices would force inflation to around seven per cent, with Chancellor Jeremy Hunt even warning in advance that August’s figures may be a “blip“.
Core inflation, which strips out volatile components such as food and energy, dropped to 6.2 per cent from a previous reading of 6.9 per cent. Services inflation fell to 6.8 per cent from 7.4 per cent last month.
“With today’s data, two out of the three indicators that the MPC has set out to monitor inflation persistence have now shown notably more progress than anticipated since the August meeting,” Goldman said.
Alongside core and services inflation, the third key indicator is wage growth, which remains much higher than the Bank would like at 7.8 per cent.
This morning’s figures also prompted many more analysts to reassess their expectations.
Martin Beck, chief economic advisor at the EY Item Club, said the “big downside inflation surprise will put pressure on the MPC to pause”.
“There’s a good chance that the MPC will hold off from another rate rise tomorrow and that the peak in interest rates has potentially already been reached,” Beck said.
Chris Hare, senior economist at HSBC, said the data was a “major curveball” for the Bank of England. He still expected rates to be lifted by 25 basis points tomorrow, but said the data “raises a risk” that the MPC will refrain from lifting rates any higher after that.
With rates expected to peak at a lower rate, if they have not peaked already, the pound came under renewed pressure. It dropped steeply against the dollar as soon as the inflation data was revealed, and while it has recovered slightly, it was 0.24 per cent lower against the dollar at $1.2360 at the time of reporting.
Dominic Bunning, HSBC’s head of European FX research, said the pound was destined for a slow fall over the next nine months, hitting as low as $1.18.
“It is hard to see how the cyclical story can provide much support to GBP,” he said.