BoE will not cut rates in December

The September inflation report out of the UK provided welcome news for the Bank of England. Inflation undershot expectations and was unchanged from the previous month at 3.8%, while the core subindex actually receded slightly to 3.5%.

This has revived the possibility of an MPC cut in December, with swap markets now seeing around a two-in-three chance of another rate reduction before the year is out.

We are not convinced, however. It still holds true that UK inflation remains much closer to 4% than 3%, and still almost double the Bank of England’s 2% target, with no concrete evidence as of yet that price pressures have indeed peaked.

In the absence of a marked deterioration in activity data, we think that the MPC will probably err on the side of caution and stay put for now, which should be marginally positive for the pound.

The real wildcard here is, of course, the Autumn Budget, as a tax-heavy, anti-growth fiscal policy could elicit a more dovish retort on the monetary policy side.