UK, Inflation 'Slows' for 3 Consecutive Months... Will Interest Rates Still Rise?

August Inflation Rate 6.7%
Experts Say "Not a Level to Reverse Policy Direction"

"Can the UK continue raising interest rates despite the slowdown in inflation?"

This question arose after the UK Consumer Price Index (CPI) for August, released on the 20th (local time), showed a slowdown to 6.7%. Major foreign media such as The Wall Street Journal (WSJ) reported that market expectations regarding the Bank of England's (BOE) monetary policy have shifted just one day after the UK CPI announcement.

As the UK's inflation rate has slowed down contrary to market expectations, the outlook for the base interest rate is shifting from a hike to a hold. The August CPI is the lowest in 18 months since February last year. Initially, the market largely expected the BOE to raise the base rate from 5.25% to 5.5%, marking the 15th consecutive rate hike.

WSJ noted, "UK inflation has shown a slowdown trend for three consecutive months," and added, "As signals of easing inflation expand, the BOE has room to reverse its existing monetary policy." One foreign media outlet reported that market expectations for a rate hold rose from 20% to 47% after the inflation data release.

Andrew Bailey, Governor of the BOE. [Photo by Reuters]

However, opinions differ on whether this inflation data is enough to change the BOE's policy stance. Yael Selfin, Chief Economist at KPMG, said, "This inflation data will not affect the BOE's rate decision the next day," adding, "International oil prices have risen more than 25% since June, reigniting inflation concerns, and global food prices are under pressure due to the climate crisis."

James Smith, Economist at Dutch investment bank ING, also said, "It is a very close call, but the BOE will raise rates as previously expected." He added, "If the rate hike occurs, it will be the last one this year."

Currently, UK inflation remains higher than that of other major advanced economies. The UK's August inflation rate is 2 to 3 times higher than the US (2.5%) and remains elevated compared to other major countries such as the Eurozone (5.2%), Germany (6.4%), and France (5.7%).

If the BOE takes a baby step (a 0.25 percentage point increase in the base rate), the UK's base interest rate will rise to 5.5%, the highest in 16 years. Since December 2021, the BOE was the first among major European countries to begin tightening and has continued tightening without a break for over 1 year and 9 months.