Financial markets took the hint and pushed the pound lower against the dollar and euro in response, while interest rate futures rose to reflect expectations that the bank will cut its key interest rate twice more by year end. The benchmark FTSE 100 stock index, meanwhile, rose 0.5 percent to its highest in nearly two weeks.
“While not our base case, the odds of a back-to-back rate cut are on the rise. A September rate cut should no longer be off the table,” said Deutsche Bank analyst Sanjay Raja in a note to clients. He added that “it’s entirely conceivable to think that we could get multiple more rate cuts this year.”
The market response was largely due to hotels and restaurants cutting their prices, which caused services inflation to ease markedly to 5.2 percent from 5.7 percent in June. Services prices have a particular importance for the BoE because their inputs are overwhelmingly domestic, and as such are a clearer reflection of underlying inflation pressures. They have been the bank’s biggest bugbear for over a year.
The numbers come a day after the ONS reported that wages, a key driver of service sector inflation, grew at the slowest pace in over two years in June.
Taken together, this week’s numbers appear should reassure Governor Andrew Bailey & co. that the BoE can afford another cut to support an economy that, while performing better than expected so far this year, is still growing at a rate of less than 1 percent.
However, the bank is unlikely to hurry. At its August meeting, four members of its nine-strong Monetary Policy Committee — including Chief Economist Huw Pill — still voted against cutting at all. And in an interview with the FT earlier this week, one of those dissenters, Catherine Mann, warned that wage-driven inflation pressures could persist for some time yet.