The UK’s Office for National Statistics (ONS) is set to release August’s Consumer Price Index (CPI) data on Wednesday. CPI, a key indicator of inflation, plays a critical role in shaping the Bank of England’s (BoE) monetary policy, making this report a significant driver for the Pound Sterling (GBP).
In August, the BoE reduced its benchmark interest rate by 25 basis points to 5%, a decision backed by a narrow majority of 5 out of 9 Monetary Policy Committee (MPC) members. This expected move weighed on the GBP, leading to a decline against the US Dollar, with the GBP/USD pair dropping to a low of 1.2664 shortly after.
Economic Calendar of UK on 18/09/24
The August CPI is projected to show an annual increase of 2.2%, consistent with July’s figure. The core annual inflation rate is forecasted to rise to 3.5%, up from 3.3% in the previous month, while the monthly CPI is expected to grow by 0.3%, recovering from a 0.2% drop in July.
The BoE is scheduled to announce its next monetary policy decision on Thursday, with inflation trends likely to influence the outcome. Market analysts predict the central bank will maintain rates before considering more assertive action in November. The BoE has projected that inflation could peak at 2.75% in the coming months before gradually declining, potentially falling below the 2% target by 2025.
Last week, the BoE also released a quarterly survey indicating that inflation expectations for the next 12 months have fallen to 2.7%, marking a three-year low. However, the five-year outlook edged up slightly to 3.2%, compared to 3.1% in May, supporting the likelihood of holding rates steady, reinforced by the expected CPI outcome.
In this context, any deviation from the forecast CPI figures may have a limited impact on the GBP. Higher-than-expected inflation could dampen hopes for aggressive rate cuts, but the BoE is expected to continue its rate reduction path, with little chance of a rate hike. Markets do not anticipate a rate cut in this week’s meeting, which would likely minimize the impact on the currency.
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