Santander Economist Victoria Clarke reacts to UK inflation data which slipped to its lowest level in eight months, a bigger than expected drop that clears the path to an interest-rate cut at the Bank of England on Thursday. She speaks on Bloomberg Television.

London

Recent data shows a broad-based decline in UK inflation, leading traders to anticipate a greater likelihood of interest rate cuts by the Bank of England through 2026. Despite this, some policymakers remain cautious, citing ongoing concerns about elevated services inflation and strong wage growth, particularly in the public sector.

While the headline inflation figures have softened, services inflation remains high at 4.4%, and structural issues such as labour market dynamics continue to worry more hawkish members of the Bank. The central bank has shifted focus away from monthly data, but the sustained elevated levels in the three-month averages suggest that policymakers are not yet ready to declare inflation risks resolved.

UK inflation drop clears way for BOE rate cut

Is this a fluke or is it enough to comfort the hawks on the Bank of England who were worried about inflation longer term? I don't think it's a fluke but I also think that the hawks on the Bank of England will still be there fretting about some of the structural stories in the background. So I think you know in the middle is Governor Bailey you know he's the he's the key voter that's going to decide what they'll do in December. It's certainly enough for him because I think the weakness is fairly broad versus the expectations but if you're the Hawks, if you're Hugh Pill, you know you're Claire Lombardelli, you're Catherine Mann, you're still going to be sitting there thinking okay services inflation is quite high. It's still 3.2 and I'm also worried about maybe what's going on there in the labour market and whether the labour market softness is really going to deliver the softer pay growth that will keep inflation low into next year and beyond. Okay well we've had traders updating their bets so they've added to them for next year. They now see 69 basis points of cuts by the end of 2026. I think before this they'd seen about 58 basis points. Does it at all change your outlook for next year? I think it does when you see this level of subdued price setting in quite a few sectors. I think you know there's a couple of things going on here this time. One is possibly that Black Friday timing's a factor and that might be overstating the degree to which we've seen this this softening and you might see some of that come back in December. Airfares is another factor. Always a wild card for UK inflation. That could come back but what we're starting to see actually over the last three months is a picture where in some of those really discretionary areas of price setting where demand has been subdued the prices are being set in a more subdued way and I think if that carries on into next year you can win the hearts and the minds of the Hawks but it's going to take a bit more time when they've still got those structural worries at the back of their mind. And those who are worried and hawkish and structurally concerned around inflation then Victoria might be looking at the services number and saying well that is such a big part of the UK economy and yes it came in lower than expected at 4.4 percent but it's still 4.4 percent. It's still pretty high and it's not much lower than the estimate of four and a half. So how will that services number influence the thinking do you think at the BOE? Yeah it's an interesting one. I mean something that happened at the monetary policy report last time was that they took out the monthly services number which to me felt like a little bit of a sort of hint that we shouldn't obsess or focus on it quite so much but the absolute level in the three-month picture which they do still give us their view for is important and you're absolutely right it's still elevated and the Hawks have been worrying that pay growth at large you know beyond the private sector number is still elevated. Public sector pay growth is very hot that's more cash into pockets. I don't think that there's enough there to shift the structural story and the services inflation number is exactly a symptom of the fact that you have had strong labour cost growth continuing to drive some of those service labour cost heavy service sector firms.

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Council of the City of Sydney

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