The die is cast for Chancellor Rachel Reeves as she cleared the last hurdle of inflation data ahead of the Budget next week, with markets unmoved by a fall in the CPI, according to Rathbones, one of the UK’s leading wealth management groups.
As the Budget looms ever closer, the latest economic data releases are unlikely to affect the Chancellor’s decision-making, at least in the absence of a major shock, said John Wyn-Evans, Rathbones’ Head of Market Analysis, adding: “Today’s inflation report does not fall into that category. Indeed, it looks relatively benign.”
He said: “The die is cast. There is nothing of note now and November 26. After what feels like months of speculation, we are now at the sharp end; now, conversely, the Chancellor’s decisions next week will shape the inflation outlook and the Bank of England’s next move.”
The fall in headline inflation from 3.8% to 3.6% in September was a little smaller than implied by the consensus forecast of 3.5% but directionally positive, said John, adding that the Government would be warmed by the fall in ‘bugbear’ services inflation from 4.7% to 4.5%.
“However, the government’s latest U-turn on tax increases planned in the Budget means that we are not yet out of the woods,” he said. “By abandoning the idea of raising income taxes, the Chancellor could still be more dependent upon raising levies that increase inflation, such as taxes on any sort of consumption. Thus, we would expect the Bank of England to reserve judgement until it has seen the contents of the red briefcase.
“Even so, market-based expectations for the 18 December meeting of the Monetary Policy Committee have seen the probability of a quarter-point cut rise from around 20% a month ago to 86% this morning. The last vote was 5-4 in favour of no change, with Governor Andrew Bailey casting the deciding vote. His comments since then suggest that he will flip the other way next time in the absence of nasty surprise.
“The level of the pound remains the best barometer of sentiment. It initially sold off a little on the news but has since returned to where it started the day, suggesting that investors see little in the release to change policymakers’ current thinking.”
All eyes will now be on the Chancellor’s Budget next week, as markets and policymakers await signals on the UK’s economic direction.
