Emmanuel OchayiIn a surprising turn of events, the United Kingdom’s inflation rate posted an unexpected decline to 6.7% in August, leaving experts and economists reevaluating their predictions and sending ripples through global financial markets.
The lower-than-expected figures have now put pressure on the Bank of England to reconsider its series of interest rate hikes, with analysts speculating on the potential ramifications for the UK and its international counterparts.
The Office for National Statistics (ONS) unveiled these figures, taking many by surprise as economists had anticipated a rise in inflation from July’s 6.8% to a more alarming 7% in August.
The immediate reaction was an initial sell-off of the pound sterling, as traders scrambled to adjust their interest rate expectations. Swaps markets, which gauge the future trajectory of the Bank of England’s rates, saw a dramatic shift, with a probability of a 0.25 percentage point increase to 5.5% on Thursday dropping from a robust 80% to an even split.
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Gilt yields and the pound sterling also experienced a dip, with two-year gilt yields falling by 0.14 percentage points to 4.85%, and the pound initially declining by 0.4% against the US dollar before stabilizing at $1.24. This came as the US Federal Reserve’s interest rate decision loomed, creating a dynamic market environment.
Amid this turmoil, shares in housebuilders and real estate companies surged, driven by hopes that the Bank of England would reconsider its rate hike plans. Taylor Wimpey, Barratt Developments, and Land Securities emerged as the top gainers in the FTSE 100, with increases of 5.5%, 4.7%, and 4% respectively.
What baffled financial markets and economists the most was the fact that prices in August this year had actually risen less compared to the same period last year, despite the increase in petrol and diesel prices due to higher crude oil costs. This unexpected trend was attributed to a decline in restaurant prices during the month and more moderate price increases in goods and services related to pets and recorded media.
August alone saw consumer prices rise by a mere 0.3%, falling significantly short of the 0.7% expected by economists. Key indicators of annual inflation that are closely monitored by the central bank also took a hit. Core inflation, excluding food, energy, alcohol, and tobacco, stood at 6.2% in August, down from the 6.9% recorded the previous month.
The price of services also saw a moderate increase of 6.8% in August, a drop from the 7.4% rate observed in July. These figures suggested a potential slowdown in the inflationary trend.
In the month of August, 61% of categories of goods and services measured by the ONS still experienced price increases exceeding 5%, but this was down from 66% in July, marking the lowest figure of the year.
The unexpected drop in inflation has raised questions about the Bank of England’s plans for its 15th consecutive interest rate increase, currently at 5.25%. While wage growth has outpaced expectations, the signs of moderation across most goods and services have led some to speculate whether the previous rate hikes have already achieved price stability.
However, despite the surprise, most economists still believe the Monetary Policy Committee will proceed with a 0.25 percentage point rate increase on Thursday. Paul Dales, Chief UK Economist at Capital Economics, commented, “We still think the bank will raise interest rates by 0.25 percentage points tomorrow, although the risk that the bank leaves rates unchanged and rates have already peaked has just increased.”
According to Financial Times, Yael Selfin, Chief Economist at KPMG UK, pointed to the 25% increase in oil prices since June as a reason to anticipate ongoing inflation, stating, “We expect inflation to return to [the 2%] target only by the latter part of 2024, as businesses continue to pass on higher costs in order to rebuild margins. Under these circumstances, it would be surprising to see the BoE doing anything other than raising interest rates by 0.25 percentage points tomorrow.”
However, there is a growing minority who argue that a rate hike would be a mistake. Suren Thiru, Economics Director at the Institute of Chartered Accountants in England and Wales, believes that the drop in inflation indicates that the UK is making headway in controlling rising prices. He cautioned against unnecessary tightening, emphasizing the lag between interest rate hikes and their impact on inflation.
Chancellor Jeremy Hunt welcomed the ONS figures but cautioned that inflation “is still too high, which is why it is all the more important to stick to our plan to halve it so we can ease the pressure on families and businesses.”
In an exclusive interview with Renowned economist, Rasaq Abiola, he shed light on this remarkable development and its implications, offering insights into what lies ahead for both the UK and Nigeria.
“Inflation rate of 6.7% is the lowest the UK has seen since February 2022, and it’s quite a relief, not just for the government or the Bank of England but also for the people,” Abiola stated, emphasizing the broader significance of this drop.
He noted that while the UK’s inflation rate remains higher than that of other developed countries like France, Germany, and Canada, and is still distant from the Bank of England’s 2% target, it does provide some breathing room for monetary policy.
“The ease in inflation provides some comfort that the Bank of England may take a pause on interest rate hikes,” Abiola explained.
Over the past year, the Bank of England has consistently raised benchmark interest rates, reaching 5.25%. This upward trajectory had caused mortgage rates, credit card interest rates, and the cost of borrowing to soar, putting significant pressure on the standard of living and financial stability in the UK.
“Many analysts expected further inflationary pressures due to rising gasoline prices, but I believe that these expectations overlook the high base effect of the Consumer Price Index (CPI) and the steady moderation in spending caused by the high-interest rate environment,” Abiola commented.
Additionally, the relatively stronger value of the pound has played a mitigating role in offsetting the impact of higher gasoline prices.
“Hopefully, as inflation eases and the Bank of England takes a pause on further interest rate hikes, concerns over the risk of recession may be averted,” Abiola optimistically suggested.
“This could be replaced with a positive sentiment of modest output growth in the quarters ahead.”
However, the impact of the UK’s inflation decline on Nigeria, a nation with historical trade relations with the UK, remains limited. Abiola further elaborates that: “For Nigeria, it’s partly positive, but the impact is limited due to reduced trade relations.” Nigeria’s inflation woes are primarily structural, with minimal influence from imported components in the Consumer Price Index basket. Abiola emphasizes, “Imported inflation in Nigeria is largely driven by exchange rate fluctuations rather than the actual inflation rates in foreign countries.”
As the United Kingdom finds itself on a path toward taming inflation, the consequences of this economic phenomenon ripple beyond its shores. While it offers a glimmer of hope for British citizens and the financial system, it leaves Nigeria relatively untouched due to its distinctiveness.
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