• Inflation falls to 4.6% prompting markets to price in rate cuts in H1 2024
• Mortgage approvals tick up in October as homeowner sentiment remains steady but low
• Household savings increase in October and are on course to grow in 2023

Inflation falls significantly but monetary policy likely to remain restrivtive

1. Inflation has begun to fall across the developed nations, which is now driving down interest rate expectations. In the UK CPI inflation was 4.6% in the 12 months to October, down from 6.7% in September. The driver behind this fall was energy costs, where gas costs fell by 31.0% in the year to October 2023 and electricity costs by 15.6%. Although electricity and gas prices have reduced, their prices are still high in comparison to recent years – with gas around 60% higher than in October 2021 and electricity 40% higher. Annual core CPI (which excludes energy prices) also fell, but more modestly, to 5.7% in the 12 months to October from 6.1% in September.
2. Financial markets are now expecting Bank Rate to start falling by the first half of 2024, and be around 3.50% in five years-time. This is now feeding into mortgage rates which are also falling (see charts at end). Market expectations are somewhat at odds with guidance from the Bank of England who say it’s it too early to be thinking about cutting rates as whilst the headline rates of inflation have dropped, they are looking for evidence that inflation will be persistently lower. In a speech, new MPC member Megan Greene explores the medium term outlook for inflation and interest rates, and concludes that whilst higher rates are weighing on economic activity, she is more concerned about the persistence of higher inflation due to tight conditions in the labour market. Many have also criticised the Bank (such as at the Treasury hearing 5 July 2023) for acting too slowly tighten monetary policy, and warn that the same mistake should not be made when cutting them.
3. In July to September the unemployment rate remained relatively unchanged at 4.2% according to experimental estimates (due to increased uncertainty around the Labour Force Survey) from the ONS. Annual regular pay (excluding bonuses) grew by 7.7% in the period, slightly lower than in the previous periods, but still very strong by historical standards, and now higher than inflation. This suggests that labour market conditions remain tight. However in August the number of job vacancies fell by 58,000 to 957,000 – the 16th consecutive monthly fall. If this trend continues it should ease pressure on wage growth. The ratio between unemployment and vacancies is a key metric for the Bank in determining monetary policy, whose policy stance is unlikely to soften whilst the ratio remains high.

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