UK Services Inflation Softens, Raising Odds of BoE Rate Cut in Q4; GBP/USD Dips

UK Services Inflation Cools: Is It Enough for the BoE to Cut Rates in Q4?

UK core and services inflation eased in August, fueling speculation about a Bank of England rate cut in November.

The UK’s annual inflation rate (headline) remained at 3.8% August, while core inflation eased to 3.6% (July: 3.8%).

Key data from the Office for National Statistics included:

• The Consumer Prices Index, including owner-occupier housing costs (CPIH), increased 4.1% in the 12 months to August after rising 4.2% in July.
• Air fares made the largest downward contribution; restaurants and hotels, and motor fuels made upward contributions.
• The Core CPIH (excluding energy, food, alcohol, and tobacco) rose 4.0% in the 12 months to August, easing from 4.2% in July.
• Core CPI (excluding energy, food, alcohol, and tobacco) softened from 3.8% in the 12 months to July to 3.6% in the 12 months to August.
• The CPI services annual rate cooled to 4.7% in August, down from 5% in July.

The softer services inflation could prove pivotal after the BoE previously raised concerns about elevated services sector inflation.

 

UK Economic Indicators and the BoE’s Policy Outlook

What do today’s inflation numbers mean for GBP/USD and traders? The inflation report followed September’s Labor Market Overview report, which increased market focus on consumer price trends.

Average earnings, including bonuses, increased by 4.7% in the three months to July year-on-year after rising 4.6% in June. Meanwhile, the unemployment rate remained steady at 4.2%. A pickup in wage growth and steadying unemployment could boost spending and fuel demand-driven inflation.

With wages and inflation still above the 2% target, the BoE’s next decision will signal its Q4 rate path.

Economists expect two votes in favor of policy easing and seven to keep interest rates at 4% on Thursday, September 18. A higher-than-expected number of votes to cut rates on Thursday could raise expectations of a November policy adjustment. However, inflation and wage growth would need to fall sharply in September to green-light a policy adjustment.

ING Economics commented on the labor market data, stating:

“Private sector employment fell further in August, which should help take wage growth below 4% by year-end. That keeps the door open to further Bank of England easing, though our call for a November rate cut hangs in the balance.”

GBP/USD Choppy Post-Inflation Data

Ahead of the inflation report, the GBP/USD dropped to a low of $1.36369 before briefly climbing to a high of $1.36589. Following the inflation report, the pair briefly rose to $1.36526 before falling to a low of $1.36419.

On Wednesday, September 17, the GBP/USD was flat at $1.36456, reflecting uncertainty about the BoE’s policy outlook through the fourth quarter.

Looking Ahead

Traders now turn to Thursday’s Bank of England’s monetary policy decision. However, UK retail sales data (September 19) and Services PMI numbers (September 22) could influence the BoE’s policy stance for Q4.

Economists expect retail sales to rise 0.4% month-on-month in August after July’s 0.6% increase. A higher reading may temper expectations of BoE policy easing in Q4, while an unexpected drop in sales could support a more dovish BoE rate path.

Meanwhile, a sharp drop in the Services PMI may raise expectations of a November rate cut, given that the services sector accounts for over 70% of the UK GDP. Beyond the headline PMI, traders should consider employment and price trends. Job cuts and softer price pressures would support a more dovish BoE stance, weighing on GBP/USD. Economists forecast the S&P Global Services PMI to fall from 54.2 in August to 51.7 in September.

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