Evidence UK inflation pressures easing hits sterling
Markets had expected the Bank of England to lag behind other central banks in cutting rates through to the end of 2025, mainly due to evidence of persistent inflationary pressures. However, this week saw both UK private sector regular pay growth (4.5%) and CPI inflation(1.7%) ease. Hence, investors now expect the Bank of England to cut rates towards 3.5% byend-2025, vs 3.8% previously. Also, UK 10-year Gilt yields have fallen back to 4.08%, no longer with a marked spread to US Treasury yields. Similarly, the sterling/dollar exchange rate has fallen back to $1.299, having peaked at $1.34 in late September. The next key event is the October 30th Budget, with speculation growing a £40bn package of spending cuts and tax rises, worth 1.4% of GDP, will be implemented. If so, this will act to cool the UK economy, perhaps persuading markets the Bank of England has even more scope to loosen its monetary policy.
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