The Bank of England is less likely to cut interest rates tomorrow, the City believes, after this morning’s inflation report showed a rise in core inflation in August.
The money markets show that the odds of the BoE making no change to borrowing costs at noon on Thursday have risen to 73% this morning.
That’s up from 65% before we learned that headline inflation stuck above the Bank’s target in August, at 2.2%.
Monica George Michail, associate economist at research institute NIESR, says the Bank will have noted that underlyinng inflation “remains elevated”, even though headline CPI inflation was unchanged:
“Annual CPI inflation in August remains unchanged from July at 2.2%. Core and Services inflation rates have slightly gone up, after an encouraging fall in July, recording 3.6% and 5.6%.
Given that inflation is set to gently rise towards the end of the year, and that underlying inflation remains elevated, this reduces chances of a rate cut tomorrow, and new developments will be closely monitored by the MPC”
Key events
Google wins challenge against €1.49bn EU antitrust fine
Google has won a legal challenge against a €1.49bn antitrust fine for hampering competition in the online search advertising business.
The Luxembourg-based General Court has annulled the fine, despite also mostly agreed with the European Union competition enforcer’s assessments of the case five year ago.
The judges said:
“The court (…) upheld most of the commission’s assessments, but annulled the decision imposing a fine of almost 1.5 billion euros on Google, on the grounds in particular that it had failed to take into account all the relevant circumstances in its assessment of the duration of the contractual clauses that it had found to be unfair.”
Back in 2019, the EC ruled that Google had abused its market dominance in online advertising, by forcing web publishers not to accept adverts from its rivals or making them reserve the most profitable space on their search results pages for Google’s adverts.
UK rents soar by 8.4%
UK tenants continue to be hit by inflation-busting rental increases.
Average UK private rents increased by 8.4% in the 12 months to August, the ONS reports.
That’s down from 8.6% in the 12 months to July, but still almost four times faster than the headline rate of inflation.
The ONS adds:
Average rents increased to £1,327 (8.5%) in England, £752 (8.5%) in Wales, and £969 (7.6%) in Scotland, in the 12 months to August 2024.
In Northern Ireland, average rents increased by 9.9% in the 12 months to June 2024.
In England, rents inflation was highest in London (9.6%) and lowest in the South West (6.4%), in the 12 months to August 2024.
UK house price inflation slowed in July
Just in: UK house price inflation has slowed.
The average UK house prices increased by 2.2% to £290,000 in the 12 months to July, new data from the Office for National Statistics shows.
That’s down from 2.7% in the 12 months to June 2024.
The ONS reports that average house prices increased in England to £306,000 (a rise of 1.6%), in Wales to £218,000 (2.0%), and in Scotland to £199,000 (6.0%) in the last year.
A UK interest rate cut tomorrow is “completely off the table”, reckons Sam North, Market Analyst at trading platform eToro:
North explains:
“UK services inflation slightly exceeded expectations in August at 5.6% year-on-year, prompting a brief hawkish lift in GBP [the pound].
“However, the release is unlikely to significantly impact the BoE’s upcoming policy decision, with an unchanged Bank Rate still expected.
“The consensus for tomorrow is for a 7-2 vote split, and while I don’t think this will change that, the BoE will hope this is not the start of a new upwards inflation trend.”
Stuart Rose takes control at struggling Asda
Newsflash: There’s a leadership shake-up at struggling retailer Asda.
Asda has announced that veteran retailer Sir Stuart Rose, currently its chairman, is to lead the business, taking over from co-owner Mohsin Issa, as it tries to reverse a sales decline.
Issa will now focus on running EG Group, the petrol station and convenience store chain which he and his brother Zuber built their fortunes.
Lord Rose, the former CEO and chairman of Marks & Spencer, says:
We respect Mohsin’s decision to move on from his role at Asda where his work is complete to be the sole CEO of EG Group.
We are very grateful to Mohsin for the role he has played in overseeing Asda, including launching into the growth market of convenience stores and introducing a loyalty app now used by more than six million customers. He has laid the foundations to deliver a world-class IT infrastructure, strengthening Asda for the long term. I look forward to continuing to benefit from his insight as a non-executive director on our Board.”
The move comes after Asda lost market against rivals, with sales falling by over 6% in the three months to mid-August.
Rose told the Telegraph last month that he was “embarrassed” by Asda’s performance, and that he would urge Mohsin Issa to permanently step back from the day-to-day running of the business. That urging seems to have come to fruition today.
Asda says Rose will assume Mohsin Issa’s executive responsibilities alongside Rob Hattrell, a partner at TDR Capital, the private equity firm who bought Asda alongside the Issa brothers in 2020.
Following reports, which have been denied, of a rift between the brothers, Zuber sold his Asda stake to TDR this summer.
Asda adds that it is still looking for a CEO to lead the business “in the next phase of its strategy”.
The pound has risen this morning, as the odds of a surprise interest rate cut tomorrow fade.
Sterlging has gained almost a third of a cent against the US dollar to $1.319, towards the one-week high it touched yesterday.
Daniel Casali, chief investment strategist at wealth manager Evelyn Partners, says:
The broader trend of lower UK inflation should encourage the BoE to cut interest rates this year, but at a relatively slower pace compared to the US. Potentially, this should provide upside for the sterling exchange rate against the US dollar.
There is some good news for households and the Bank of England in today’s inflation report, says Sanjay Raja, chief UK economist at Deutsche Bank Research:
But, today’s data won’t be enough to trigger a surprise UK interest rate cut tomorrow, Raja predicts, explaining:
Headline CPI came in line at 2.2% y/y. But core CPI edged higher to 3.59% y/y, and services CPI ticked higher to 5.56% y/y – both a tenth above our own projections.
The strength in services inflation came down to stronger than expected airfares, which shot up 22% m/m, offsetting the bigger fall in accommodation prices. The good news is that despite the stronger services and core goods prints, food and energy inflation surprised to the downside.
Today’s UK inflation report “cements” the view that the Bank of England will pause tomorrow and leave interest rates unchanged, says Ruth Gregory, deputy chief UK economist at Capital Economics.
She adds:
We continue to assume the next 25 basis point rate interest rate cut will take place in November and that rates will be cut at alternative BoE meetings until June.
Chart: UK inflation
On the face of it, today’s inflation rate of 2.2% gives the BoE confidence towards lowering interest rates further this year.
But, says professorCostasMilas of the UniversityofLiverpool, it’s not that simple. He argues that recent public sector pay deals could push up inflation.
He tells us:
Services inflation, a good proxy for domestic pressures has gone up to 5.6% in August.
I still believe that the latest public sector wage increases of 5.5% (plus ) will push up services inflation (and therefore CPI inflation) further within the next 9 months as I pointed out in a recent London School of Economics Business blog. This suggests the Bank’s MPC should, for the time being, keep interest rates unchanged.
After the Federal Reserve’s monster 0.5 percentage point cut in US borrowing costs on Wednesday, it seemed strange that the Bank of England should sit on its
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