Due to the rise in oil prices offsetting the downward pressure on food prices, inflation in the UK did not slow down as expected in September. On Wednesday local time, the UK Office for National Statistics released data showing that the Consumer Price Index (CPI) rose 6.7% year-on-year, the same increase as last month, ending three consecutive months of decline. Economists had previously expected inflation to fall back to 6.6%.
Data shows that the core inflation rate, excluding volatile food, energy, alcohol, and tobacco prices, decreased from 6.2% in August to 6.1% in September, a smaller than expected decrease. The outlook for inflation in the service sector is the biggest headache for the Bank of England, and it remains mixed. Goldman Sachs' analysis shows that the strong inflation performance in the service industry over the past year has been driven by a combination of astonishingly high wage growth and non wage cost inflation.
The current inflation level in the UK is higher than the 5% that Prime Minister Sunac plans to achieve by the end of the year, and also higher than the 2% target level that the Bank of England hopes to achieve. It is also the highest among major developed economies, followed closely by France and Italy, with inflation rates of 5.7% and 5.6% in September, respectively.
According to media analysis, it will be a difficult choice for the Bank of England to decide which side to lean towards and whether to further raise interest rates between controlling inflation and stabilizing growth. Previously, in response to high inflation, the Bank of England raised its key interest rate by 25 basis points in early August to a 15 year high of 5.25%, marking its 14th consecutive rate hike. However, there was no further interest rate hike in September.
Next, the Bank of England will hold its next meeting on November 2nd. Officials are weighing whether more measures are needed to bring inflation back to the target of 2%. At present, the market's bet on further interest rate hikes is basically stable, with an expected 30% chance of a 25 basis point hike next month and over 60% chance of a hike by early next year. In addition, the market expects to cut interest rates by 40 basis points next year, with the first rate cut scheduled for November.
Paul Dales, a macroeconomist at Kaitou, stated that although the CPI did not decline in September, the Bank of England may not raise interest rates at its next meeting, especially considering that the CPI is still lower than the Bank's expectations of 6.9% in August.
Dales stated in a report that the inflation rate in the service industry has rebounded from 6.8% in August to 6.9% in September, but it has still decreased compared to 7.4% in July. Therefore, the Bank of England can say that the easing speed of domestic price pressures is faster than expected. In addition, he stated that due to the new energy cap policy introduced by the Ofgem in the UK, inflation may significantly decrease in October. However, the new risk is that the situation in the Middle East will limit the extent to which inflation will decrease next year.
Recently, market expectations that the Bank of England's interest rate hike cycle is nearing its end are heating up. Mocht Kumar, Chief Financial Economist for Jeffrey Group Europe, stated that the Bank of England is expected to continue raising interest rates, but even if it does, it may still be the last rate hike in this tightening cycle. Goldman Sachs recently lowered its interest rate peak forecast for the Bank of England's interest rate hike cycle by 25 basis points to 5.5%.
The report released by the International Monetary Fund on the 11th also predicts that the Bank of England will raise interest rates by another 25 basis points to 5.5%. The Chief Economist of the International Monetary Fund, Colin Chase, stated that overall, the growth momentum in the UK is relatively weak, the labor market is cooling, and high inflation is still ongoing. This will require monetary policy to remain tight for a period of time until next year.
As a result, the pound exchange rate has further come under pressure. Exchange rate data shows that the exchange rate of the pound against the US dollar has remained basically in the range of 1.2 to 1.3 US dollars this year. This is an obvious change after the sharp fall to a record low of US $1.035 from the Truss government last year, and the exchange rate turbulence after the Brexit referendum in 2016.
MillTechFX, a foreign exchange data statistics company, stated in a report that the proportion of companies hedging against fluctuations in the sterling exchange rate across the UK has dropped from a high of 89% last year to 70%. According to survey data from 250 chief financial officers and financial executives, UK companies that typically engage in currency hedging measures have significantly reduced their hedging scale, and the number of companies considering starting hedging is also decreasing.
Jan Foley, head of foreign exchange strategy at Rabobank, stated that the euro is weak, while the pound remains weak against the euro, indicating a skeptical attitude towards the UK economy in the market. Foley said that the Bank of England's tightening policy may push the UK economy into recession, and in the face of these issues, the market is unwilling to buy pounds.
The Bank of England has previously warned that the full impact of rising borrowing costs in the UK has not yet been fully realized. The Bank of England has warned that by the end of this year, it is expected that 50% of British companies will face debt repayment pressure, which may lead to some companies significantly reducing investment plans and announcing large-scale layoffs.
Sam Woodward, partner of Ernst&Young's restructuring business, stated that major companies in the UK are becoming increasingly sensitive to the constantly changing credit environment, and the full impact of high interest rates and weak consumer demand in September has not yet been apparent. Although 2023 has been relatively calm so far, Christmas and early 2024 may be different things.
Beijing Business Daily Comprehensive Report