Bank of England Set To Cut Rates ...

Bank  of England Set To Cut Rates in November  …
The pound dropped sharply to its lowest level in two months after inflation fell by more than expected last month.

Sterling dropped 0.6pc against the dollar to below $1.30 for the first time since August after the consumer prices index fell to 1.7pc in September, according to the Office for National Statistics.

The FTSE 100 jumped higher as money market traders priced in an interest rate cut by the Bank of England next month, from 5pc to 4.75pc, as closely watched services inflation fell below 5pc for the first time since May 2022.

Money markets imply there is a 76pc chance of a further reduction in borrowing costs in December, up from a 48pc chance on Tuesday.

Don’t get too excited by the drop in headline CPI Inflation ..
CPI the consumer prices index fell to 1.7pc in September from 2.2% in August. Headlines heralded the fall in inflation to below the MPC target but don’t get too excited by the drop in headline CPI Inflation. It may not last.

Headline prices were flattered by the drop in goods inflation to -1.4% in the month. Lower oil prices and higher Sterling levels made the assist. Brent Crude averaged $74.00 dollars this year compared to $94.00 dollars in 2023. Sterling averaged £1.32 compared to $1.24 last year. That’s a 26% drop in oil costs Sterling adjusted.

Core inflation excluding food and energy eased to 3.2% from 3.6%. Concerns remain about the high level of service sector inflation at 4.9% even as job market cools and earnings fall significantly.

The drop below the 2% level will not be sustained. Goods inflation is set to rise, even as service sector inflation falls below 4%. The headline rate is set to return to the 2.5% - 3.0% level in the first quarter next year. The MPC may see some leeway for a 25 basis point cut at the next meeting in November but caution will prevail, despite some good news on wages costs in the Labour Market Update this week

Wages Ease even as unemployment rate falls.
Some goods news for the Government and the Bank of England in the Labour Market Update released this week by the Office For National Statistics, (ONS). Unemployment fell from 1.437 million to 1.386 in the period to August. The unemployment rate eased to 4.0% from 4.1%.

More people in work, the employment rate increased to 75% as employment increased to 33.4 million. Vacancies eased back to 841,000 in September from over 900,000 at the start of the year. We expend a trend return to 750,000 into 2025.

The really good news for monetary policy was the slowdown in wage inflation. In the three month average to August, whole economy total earnings increased by 3.8%, down from almost 6% in April. One note of caution the month single rate in August is estimated at 4.4%. Confused? You will be.

The trend in wage inflation will increase the probability of a rate cut in November and possibly one further cut in the first quarter of 2025. It is difficult to see a second cut for Christmas.

Long Term Note : In the UK, prior to the Great Financial Crash [2000 - 2008] the average inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year gilt yields averaged 4.50%, real GDP growth averaged 2.5%, earnings averaged 3.5%, the unemployment rate averaged 5% and vacancies averaged 650,000.

That means no return  to Planet ZIRP ...

References :
European Central Bank cuts interest rates for third time this year …
Jack Barnett 18th October 2024. The Times
https://www.thetimes.com/business-money/economics/article/european-central-bank-cuts-interest-rates-for-third-time-this-year-bvrpkv5tt

ECB Monetary Policy Statement At A Glance
https://www.ecb.europa.eu/home/html/index.en.html