So the bets are on once again for a pause in the interest rate hikes. Surely, a relief for many entrepreneurs with borrowed money.
Britain’s high inflation rate unexpectedly fell, prompting investors to raise bets on the Bank of England pausing its long run of interest rate hikes as soon as Thursday.
Official data showed the consumer price index dropped to 6.7% in August, its lowest since February 2022, from July’s 6.8%, confounding forecasts by economists polled by Reuters – and the BoE – for an increase.
Market reaction as sterling sinking
Sterling sank by half a cent to its lowest against the U.S. dollar since May and it also fell against the euro as underlying measures of inflation weakened sharply.
investors put a nearly 50-50 chance on the BoE keeping rates on hold on Thursday after 14 back-to-back increases stretching back to December 2021.
The Office for National Statistics said the slowdown in inflation was driven by a drop in often-volatile hotel prices and air fares, and by food prices rising less than a year ago.
That offset a jump in global fuel prices and an increase in a tax on alcoholic drinks.
Economists divided on whether BoE will pause rate hikes
Investors had been overwhelmingly expecting the BoE to raise interest rates again on Thursday, taking Bank Rate to 5.5% from 5.25%, even as signs of a slowdown in Britain’s economy mount.
That looked less certain after the inflation data.
At 0800 GMT, investors put a roughly 45% chance on the BoE pausing its run of rate hikes at its September meeting, up from about 20% on Tuesday.
“Thursday’s Bank of England meeting just got a lot more interesting,” James Smith, an economist at ING, said. “It’s a very close call, but we’re still tempted to say the Bank will follow through with a hike tomorrow.”
