UK inflation data in focus for the session ahead

The September report here was encouraging but all it did was help to reaffirm a 25 bps rate cut earlier this month. The BOE will next meet on 19 December and there will be two inflation reports between now and then. The first of which will be today and the second will be just a day before the policy meeting itself on 18 December.

Following the rate cut two weeks ago, BOE policymakers have been emphasising on a “gradualism” approach to cutting rates as the job is not done yet in the battle against inflation. That hints at a potential and arguably likely pause in December. However, said narrative will have to be driven by what we see in the data.

That makes today’s report the first big and real test of the above narrative.

The expectation is for headline annual inflation to come in higher at 2.2% in October, up from 1.7% in the month before. But core annual inflation is estimated to ease a little to 3.1%, down from 3.2% previously. The latter is of course the most important detail when it comes to the data release here.

As much as a further easing in core prices is a good thing for the BOE, it still being at around 3% is not quite a comfortable level to be cutting rates that aggressively. If you consider the level of services inflation, it’s definitely bothersome with that being closer to 5% in core terms still.

So, the BOE definitely has to manage policy accordingly and balance that out against the still ongoing inflation risks.

Looking to market pricing, traders are seeing ~81% odds of no change to policy in December. Therein lies the balance of risks for the pound going into the data release later.

Barring any surprises though, I would argue that it is a high bar to get the BOE to lean towards cutting rates again in December. It would require a considerable set of lower readings today and also for the November readings next month.

That is not to say that such a scenario won’t happen. But we will definitely need to see all the remaining data between now and the final policy decision next year to vindicate the BOE to cut rates further and get off their “gradualism” horse. Knowing central bankers, it’s tough to get them to change their minds. However, if need be, they will still spin the narrative to however they see fit to justify themselves being “right”.

This article was written by Justin Low at www.forexlive.com.