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Oct 16 - 06:55 PM

ING: BoE Rate Outlook Amid Plummeting UK Services Inflation

By eFXdata  —  Oct 16 - 03:00 PM

Synopsis:

ING analyzes the recent decline in UK services inflation, which has fallen below 5% for the first time since May 2022, and its potential implications for the Bank of England (BoE) and its upcoming monetary policy decisions.

Key Points:

  • Significant Inflation Drop:
    The decrease in UK services inflation to below 5% is viewed as a significant development for the BoE. This marks a genuine downward trend that the central bank will closely monitor, as it may influence future rate-setting decisions.

  • November Rate Cut Anticipated:
    Despite the positive news on inflation, it is unlikely to impact the BoE’s decision-making for the November meeting. ING expects a 25 basis point rate cut, acknowledging that officials are unlikely to consider anything more substantial at this time.

  • Future Inflation Trends:
    ING predicts that services inflation will continue to undershoot expectations, projecting it to end the year around 4.5%, significantly lower than the BoE’s forecast of 5.3%. This view is supported by survey indicators suggesting companies are becoming less aggressive in raising prices, despite persistent headline wage growth.

  • Potential for Accelerated Rate Cuts:
    If services inflation continues to decline as anticipated, the BoE may increase the pace of rate cuts following November. ING forecasts cuts in December and at each subsequent meeting until rates reach 3.25% by next summer. Governor Andrew Bailey has hinted at this direction in recent comments, with more signals expected during public appearances in Washington next week.

Conclusion:

In summary, the significant decline in UK services inflation could influence the BoE's monetary policy strategy, though immediate changes are not expected. With projections for continued inflation undershooting, ING anticipates a series of rate cuts beginning in November, reflecting a more accommodative stance as the BoE navigates the evolving economic landscape.

Source:
ING Research/Market Commentary

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