Yesterday, the pound fell and the FTSE 100 rose after a larger-than-expected drop in inflation added to expectations of interest rate cuts next year.
UK bonds also rose after inflation fell to 4.6 percent in October, down from 6.7 percent in September and the largest one-month drop since 1992.
Sterling fell by about a cent to close to $1.24 against the US dollar, while it fell by nearly half a cent to just under €1.145 against the euro.
Sterling’s Decline and FTSE’s Rise Amid Inflation Changes
Following recent inflation reports, the UK financial landscape has seen notable shifts, with Sterling falling and the FTSE indices rising. The FTSE 100, a key indicator of the UK’s economic health, increased by 0.6%, indicating a resurgence in investor confidence influenced by lower interest rates.
Similarly, the mid-cap FTSE 250, which is frequently regarded as a more direct reflection of the domestic UK economy, rose by nearly 0.8%, reaching its highest level in two months. This increase indicates the potential for mid-sized UK businesses to grow in an evolving economic environment.
Parallel to the stock market gains, banks such as Lloyds, HSBC, and NatWest saw their stock values rise by about 2%, with Barclays up by 1%. This uptick in the banking sector reflects broader market optimism about a more favourable monetary policy ahead.
The FTSE 100 maintained the head of steam it had built up on Tuesday afternoon as UK inflation followed yesterday’s US reading and came in below expectations
Meanwhile, the fall in the value of the pound against major currencies adds another layer to the economic picture. While it poses challenges in terms of international purchasing power, it may also boost UK export competitiveness. This dynamic scenario highlights the nuanced impact of changes in inflation on the UK’s financial system.
Understanding the Unexpected Drop in UK Inflation Rates
The main cause of the decline was a significant decline in energy prices as a result of regulator Ofgem lowering the price cap. Furthermore, food inflation also decreased.
It appeared to be a watershed moment in the cost of living crisis, which had seen a real inflation peak at 11.1% last autumn.
And it means that Prime Minister Rishi Sunak has met his target of halving the rate in a year’s time with two months to spare.
Rishi Sunak’s Inflation Target and Monetary Policy Outlook
When he made the pledge of halving the rate in a year’s time, inflation was above 10%.
While Sunak has declared victory, the Bank of England’s target of bringing inflation down to 2% remains a long way off, and the ‘last mile’ will be the most difficult.
The Bank of England has attempted to quell speculation about when interest rates will be cut, but markets believe it will be in June, with a one-in-three chance in May.
The latest rally in London stock markets followed steady gains the day before, when US inflation fell faster than expected, to 3.2%.
AJ Bell investment director Russ Mould said, ‘The FTSE 100 maintained the head of steam it had built up on Tuesday afternoon as UK inflation followed yesterday’s US reading and came in below expectations.
The Complex Journey Towards a 2% Inflation Goal
‘With no rate hikes expected before the end of the year, the market is now anticipating rate cuts.’
It remains to be seen whether inflationary pressures will abate and whether the Bank of England will be as eager as Rishi Sunak to declare victory in the fight against rising prices.
“For the time being, investors are in the mood to celebrate, and the prospects of a large Santa Rally are growing as we approach December.”
‘October’s consumer prices report has rightly entrenched expectations that the Monetary Policy Committee will be able to begin to reduce bank rates in about six months’ time,’ said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
It does not mean that the broader mission against high inflation has been accomplished
According to Chris Hare, senior economist at HSBC, “it does not mean that the broader mission against high inflation has been accomplished.” And the road to 2% could be long and difficult.”
The recent data from the Office for National Statistics showing a drop in inflation to its lowest level since September 2022 certainly brings a sense of relief, but it’s critical to dive deeper into what this means for the average consumer and the broader economy. Despite the headlines of prices falling, we must acknowledge that this does not necessarily signal the end of inflationary pressures. The reported figures, while indicative of a trend, might not fully encapsulate the ongoing challenges.
For one, price rises in many sectors continue to burden households. Even though the overall rate of inflation has slowed, for essential items and services, inflation remains high, affecting daily expenses. This situation has significant implications for savings accounts and those looking to borrow money. The cost of borrowing is still a concern, especially with the UK government and the Bank of England’s stance on raising interest rates to combat inflation.
While the Prime Minister’s goal of halving inflation from the peaks of the previous year seems to be on track, the ground reality for many is still a struggle with high costs. The rate cuts anticipated in the future might offer some respite, but they also pose questions about the balance between stimulating growth and controlling inflation.
In October 2022, the slight easing in the year-on-year inflation rate offered a glimpse of hope, but this must be viewed in the context of ongoing economic challenges. The rate increases over the past months have set a high baseline, and even with the recent decrease, prices haven’t returned to pre-inflation levels.
Looking ahead, while the prospect of further rate cuts might be a positive signal for those looking to borrow money, it’s also a reminder of the delicate act the UK government and financial institutions must perform. Balancing the need to stimulate economic growth while keeping an eye on inflation rates is a complex task.
In summary, while we see a positive trend in inflation numbers reaching their lowest level since September 2022, the journey towards a stable and affordable cost of living is far from over. The nuanced reality of the current economic landscape suggests that while we may not be experiencing the steep price rises of the past few months, the overall burden of high prices and the cost of living crisis remains a significant concern for many.