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The pound yesterday fell to its lowest level against the dollar since August after a sharp drop in inflation left markets betting that interest rates will be cut to 4.5 per cent by Christmas.
Sterling fell below $1.30 to $1.2979 and also fell against the euro to €1.1934.
Ten-year UK bond yields – which represent the rates charged by investors to lend to the Government – fell to 4.055 per cent, having hit 4.25 per cent just two days earlier.
Taking note? Bank of England Governor Andrew Bailey has been urged to accelerate the pace of cuts.
The story was similar for two-year bonds, which fell to a fraction of 4 percent.
Markets reacted after the Office for National Statistics (ONS) said inflation fell to 1.7 percent in September from 2.2 percent the previous month.
It was the lowest since April 2021 and was below economists’ forecast of 1.9 percent.
Experts said it solidified chances of an interest rate cut in November after they were cut from 5.25 percent to 5 percent in August.
Traders see a 90 percent chance of a cut in November and a 75 percent chance of a further cut in December.
Matthew Ryan, head of market strategy at financial services firm Ebury, said the inflation data “effectively guarantees another interest rate cut by the Monetary Policy Committee at its next meeting in November.”
He added: ‘In fact, we now see a greater chance that the vote will be unanimous and that the bank will adopt a more moderate tone in its communications that hints at faster cuts in the future.
‘Markets are already preparing for such an eventuality, and now see a three in four chance of consecutive rate cuts in November and December.
“Both scenarios would be clearly bearish for sterling, which we think could see some further decline in the near term, particularly if the Labor government also unveils broad-based tax rises in the October budget.”
Economists noted a particularly sharp drop in service sector inflation to 4.9 percent, a move that has been worrying Bank of England rate setters who fear it could prove stubborn.
James Smith, developed markets economist at ING Bank, said it was a “significant shortfall” compared to what the bank had expected.
“In other words, this latest drop looks genuine and the Bank of England will take note,” he said. ‘If we are right, then we believe the Bank of England can accelerate the pace of cuts beyond November.
“We expect a cut in December and at every meeting until rates hit 3.25 percent next summer.”
Other experts were more cautious about the likely pace of cuts, especially given the potential impact on fuel prices from the conflict in the Middle East.
“There are doubts about whether the fall in oil, and therefore fuel prices, will continue in the future,” said Investec economist Ellie Henderson.
Henderson also noted that airfare volatility played a big role in the latest figures and that, excluding this, services inflation looked more persistent.
“This served as a reminder of why the Bank of England cannot claim victory over inflation yet,” he said.
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