Pound sinks under $1.30 as merchants guess on rate of interest cuts

The pound yesterday fell to its lowest level against the dollar since August after a sharp fall in inflation left markets betting interest rates will be cut to 4.5 per cent by Christmas.

Sterling dipped below $1.30 to as low as $1.2979 and also slid against the euro to €1.1934.

Yields on ten-year UK bonds – which represent the rates charged by investors to lend to the Government – dropped to as low as 4.055 per cent having topped 4.25 per cent just two days earlier. 

Taking note? Bank of England governor Andrew Bailey has been urged to pick up the pace on cuts

It was a similar story for two-year bonds, which fell to within a fraction of 4 per cent.

Markets were reacting after the Office for National Statistics (ONS) said inflation fell to 1.7 per cent in September from 2.2 per cent the previous month.

It was the lowest level since April 2021 and undershot economists’ 1.9 per cent forecast.

Experts said it cemented the chances of an interest rate cut in November after they were cut from 5.25 per cent to 5 per cent in August.

Traders see a 90 per cent chance of a November cut taking place and a 75 per cent probability of a further reduction in December.

Matthew Ryan, head of market strategy at financial services firm Ebury, said the inflation data ‘effectively guarantees another interest rate cut by the Monetary Policy Committee at its next meeting in November’.

He added: ‘Indeed, we now see a heightened possibility that both the vote is unanimous, and that the bank strikes a more dovish tone in its communications that hints at faster cuts ahead.

‘Markets are already preparing for such an eventuality, and now see a three-in-four chance of back-to-back rate reductions in November and December.

‘Both of these scenarios would be clearly bearish for sterling, which we think could be in for some additional near-term downside, particularly should the Labour government also unveil broad-based tax hikes in the October budget.’

Economists noted a particularly sharp decline in inflation in the services sector to 4.9 per cent, a measure that has been troubling Bank of England rate-setters who fear that it could prove stubborn.

James Smith, developed markets economist at ING Bank, said it was a ‘sizeable undershoot’ compared with what the Bank had expected.

‘In other words, this latest fall looks genuine, and the BoE will be taking note,’ he said. ‘If we’re right, then we think the Bank of England can pick up the pace of cuts beyond November.

‘We expect a cut in December and at every meeting until rates reach 3.25 per cent next summer.’ 

Other experts were more wary about the likely pace of cuts particularly given the potential impact on fuel prices of conflict in the Middle East.

‘There are questions over whether falling oil, and therefore fuel prices, will be sustained into the future,’ said Investec economist Ellie Henderson.

Henderson also noted that volatile air fares played a big part in the latest figures and that when stripping this out services inflation looked more stubborn.

‘This served as a reminder as to why the Bank of England cannot call victory on inflation just yet,’ she said.