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