Market Expectations for Interest Rate Cut Rise as Survey Shows Progress Against Services Inflation
According to the latest data from the S&P Global Composite Purchasing Managers’ Index (PMI), input cost inflation has eased to its lowest level in over three-and-a-half years. This development has increased expectations for another interest rate cut next month as the battle against stubborn services inflation shows further progress.
The preliminary data from the PMI survey showed that the slowdown in cost pressures across the service sector was mainly driven by fewer supplier surcharges and more competitive market conditions. This is a positive sign for Bank of England policymakers who have expressed concerns about price growth within services as a major obstacle to interest rate cuts.
The PMI report also highlighted little change in the rate of salary increases, which has been a major worry for policymakers. This, coupled with the easing of input costs, has raised expectations for a second consecutive interest rate cut by the Bank – by two percentage points.
Recent data from the London Stock Exchange Group showed that almost 30% of participants expected a reduction to 4.75% at the September meeting. The authors of the report stated that wider findings showed the economic momentum of 2024 was set to continue but at a reduced rate compared to the first two quarters.
The flash estimate, in which a reading above 50 indicates growth, rose to 53.4 in August from 52.8 the previous month. Both the manufacturing and service sectors reported output growth and new jobs amid a more optimistic business environment compared to earlier this year. Respondents to the survey cited more positive assessments of the domestic economic outlook as a factor driving efforts to boost business capacity.
S&P Global stated that the figures were consistent with the economy expanding at a quarterly rate of 0.3%. Chris Williamson, chief business economist at S&P Global Market Intelligence, noted, “August is witnessing a welcome combination of stronger economic growth, improved job creation and lower inflation, according to provisional PMI survey data.” He also added, “The latest survey data, therefore, help lower the bar for further interest rate cuts, although the still-elevated nature of inflation in the service sector suggests that policymakers will move cautiously.”
A Reuters poll of economists published on Wednesday suggested that the Bank of England will cut interest rates just once more this year, in November. Services inflation remains one of the major stumbling blocks. While the main measure of inflation rose last month, largely due to the way energy prices are calculated, there was downward pressure from services inflation. The annual rate slowed to 5.2% from 5.7%, indicating that prices are still rising but not as sharply as before.
The PMI data provides strong evidence that further progress against services inflation is likely to be reflected in official figures in the coming months.
