Although UK inflation held steady at 3.8% in September, it does present a big warning for investors.
“Inflation near 4% should serve as a wake-up call for markets, which continue to price in two more rate cuts next year,” said George Brown, senior economist at Schroders. “High inflation is at risk of becoming entrenched in the UK, due to a combination of disappointing productivity and sticky wage growth.”
Brown therefore expects the Bank of England will keep interest rates on hold until the end of 2026. And interestingly, he doesn’t rule out its next rate move being upward.
“Public borrowing figures suggest the exchequer is experiencing the fiscal downside of this higher inflation – through increased government spending – without being equally compensated by higher revenues,” Brown added.
Offering another cautious tone, Kindar Brown, senior financial planner at Rathbones, said: “With inflation still running at almost double the 2% target, the latest reading does little to strengthen the case for looser monetary policy.”
A point shared by Hal Cook, senior investment analyst at Hargreaves Lansdown. “Inflation at 3.8% is still nearly double the Bank of England target and Andrew Bailey has been clear that future rate cuts will be made in a considered fashion and data driven. He hasn’t appeared to be in a rush to cut so far,” said Cook.
Gilts do appeal in this environment though, noted Peder Beck-Friis, an economist at Pimco who said: “We continue to see value in owning gilts.”
Investors will now be waiting on what the chancellor Rachel Reeves does in the budget on November 26.
Comments