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September rate cut more likely after inflation indicators point in right direction

Journalist: John Choong (Head of Markets and Research), Newspage

ended 05. September 2024

The odds of a September rate cut might’ve just taken a bump after a leading indicator for services inflation showed encouraging signs of abating. The services PMI survey for August confirmed what its flash estimate had projected 2 weeks ago – cooling services inflation. Meanwhile, the Bank of England's (BoE) latest Decision Maker Panel (DMP) survey also showed positive signs, as CFOs signalled a further drop in output price inflation to 4.0%, from 4.3% in July.

More encouragingly, the BoE survey also found that firms expect to reduce their own-inflation rate in the year ahead to 3.6%, from the 3.7% stated last month. As such, it’s no surprise that executives see the headline Consumer Price Index (CPI) rate at 2.7% a year from now. This complements the drop in annual wage growth to 5.8%, from 5.9% in July, although expected year-ahead wage growth remained stagnant at 4.1%.

This ties in perfectly with the PMI data, as the services sector expanded with a reading of 53.7 from 52.5, beating initial estimates of 53.3. Most prominently, both input and output cost inflation eased to yet another 3.5-year low, extending its run from July. This implies that the effect of cooling wages is slowly seeping into services inflation, albeit with salaries paid still at an elevated level.

New business continues to look healthy again, and just fractionally lower than the 14-month high seen in July. This saw services companies employ more workers, extending the current period of job creation seen in each month of the year thus far. That said, backlogs continued to deplete for a 15th consecutive month. Business confidence also dropped slightly from July, as some respondents cited elevated business uncertainty ahead of the Autumn Budget.

Considering that the decision for a September rate cut hangs in the balance due to the main concern surrounding services inflation, this morning’s data could see traders begin to price in a higher chance of a cut in 2 weeks’ time. With one or two members swaying either way of a hold or cut vote, all eyes will be on the CPI data on the 18th for confirmation that services inflation is indeed cooling as expected.

Newspage asked economists, analysts, and brokers for their views on the possibility of a September rate cut, what the latest data could spell for the economy, and the outlook for the housing market.

7 responses from the Newspage community

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Wes Wilkes
CEO at Net-Worth NTWRK
With more recent econimic data supportive of the Bank of England's desired trajectory on lowering inflation, the stage is set for a BoE blunder or a beguiling Bailey.

The data is moving us towards desired inflationary levels, fuelled in some aspects by a broad weakening. This is good news overall, but does come with real risk of policy error should the BoE decide not to move on interest rates by cutting when they have the chance.

If they instead wait for another window, it could see them lose control of the wheel should weakness in the labour market and economy accelerate. Therefore, a steady trim here could prevent a reactionary hack at rates later.
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Riz Malik
Independent Financial Adviser at R3 Wealth
The Bank of England, often criticised for lagging behind economic trends, may cut interest rates again in September if compelling economic factors arise. With the U.S. Federal Reserve expected to lower rates by up to 50 basis points, the coming weeks could prove crucial. Any further rate cuts by the BoE would likely provide a boost to the UK property market, which is beginning to show signs on recovery.
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Gabriel McKeown
Head of Macroeconomics at Sad Rabbit Investments
With services inflation cooling, the economy resembles a garden beginning to bloom after a long winter, suggesting that a rate cut could soon be in season.

The latest PMI survey paints a picture of a sector finding its wings, with improving economic conditions and domestic stability acting as tailwinds for customer demand. This resurgence has propelled activity to its highest level since April, extending the growth streak.

Furthermore, the overall rate of input price inflation has continued its descent, reaching its lowest point since January 2021, and average prices charged increased at the slowest pace in 3.5 years. This has made the prospect of a September rate cut a tantalising possibility, with the economy entering a ‘Goldilocks’ scenario of robust growth and easing inflation, providing an opportunity to cut rates without stoking inflation. With the economic orchestra beginning to play in harmony, the stage is set for the BoE to consider an encore of rate reductions.
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John Choong
Head of Equities and Markets at Investors Edge
The services PMI input inflation metric has been a crystal ball for services inflation so far this year, but it remains an open-ended question as to whether the BoE heeds its prophecy. Nonetheless, on the back of today’s data, we see the odds of a September rate cut inching up ever so slightly, although don't bet the farm just yet.

The notoriously cautious MPC, with its penchant for official ONS data, needs more convincing. Hence, the services CPI data on September 18th must beat both consensus and the BoE's own estimate of 5.8% to truly move the needle.

That said, next Tuesday's unemployment and wage growth data could be the appetiser for this high-stakes economic feast, as a further cooling trend might whet the MPC's appetite for a cut.

But even if services inflation plays nice, the energy wildcard looms large. Gas prices are flirting dangerously with the BoE’s projections, and a further uptick could force the MPC's hand to hold the pause button a little longer.
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Ben Perks
Managing Director at Orchard Financial Advisers
There is no chance that the Bank of England will give borrowers a cut to base rate this month. They seem hell bent on a slow recovery and nothing will convince them to deviate from that plan.

Hopefully, as more encouraging data emerges, we’ll see a cut towards the end of the year, as long as the October Budget doesn’t blow the doors off the whole thing.
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Simon Bridgland
Director at Release Freedom
This is the second bundle of data which made me feel great this week. Yesterday, I received results from my doctor's surgery from my annual well man check which also had some good trends of reducing numbers, all measured in order to keep me healthy and means I may live a little longer.

So, when services inflation reduces, given that our economy is strongly reliant on services, and the Decision Maker Panel also showed some positive indications that a further drop could occur, I’m left thinking the future is looking more financially healthy and it's odds on for a rate cut again soon.

The only concern I would think a financial GP would have, however, is the October Budget, and the prescription Rachel Reeves is likely to hand out. Her silence on the medicine about to be doled out indicates they could be bitter pills we need to swallow.
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Iain Swatton
Director at Exemplar Financial Services
The recent flurry of rate reductions from lenders indicates growing optimism, suggesting that a base rate cut in September is becoming more likely. With services inflation cooling and positive signals from the Bank of England, it seems lenders are preparing for a more favourable economic climate. Any rate cut would boost confidence among buyers and provide relief for those looking to remortgage, creating a positive ripple effect across the housing market.