After the UK’s annual inflation rate fell in August, ahead of the Bank of England’s interest rate decision today, investment managers discuss the impact.

Latest data released this week by the Office for National Statistics shows that UK headline inflation slowed unexpectedly from 6.8 per cent in July to 6.7 per cent in August, compared with predictions of a 7.1 per cent rise, despite a hike in fuel prices.

Most importantly, core inflation, which strips out food and energy prices, fell more sharply from 6.9 per cent to 6.2 per cent, compared with expectations of 6.8 per cent.

“Today’s news shows the plan to deal with inflation is working, plain and simple. But it is still too high which is why it is all the more important to stick to our plan to halve it so we can ease the pressure on families and businesses. It is also the only path to sustainable higher growth,” Chancellor of the Exchequer Jeremy Hunt said. 

With UK interest rates currently standing at a high of 5.25 per cent, there is still some pressure for the Bank of England (pictured) to raise rates today for one last time in this cycle to combat inflation. This is after the government pledged to reduce inflation to 5 per cent by the end of the year, with the longer-term target being 2 per cent. Nevertheless, financial markets now see a 60 per cent chance of the BoE holding rates steady at their policy meeting today.

Here are some reactions from investment managers to the latest news.

Julian Jessop, economics fellow at the free market Institute of Economic Affairs
"Today’s better-than-expected UK inflation data show why forecasters and policymakers should pay more attention to monetary aggregates. Inflation was widely expected to jump due to higher fuel prices. In fact, it fell, which is consistent with the sharp deceleration in the growth of the money supply over the last year. The Bank of England should have hit the pause button on interest rates several meetings ago to assess the full impact of the tight squeeze that is already in place. Even if the Monetary Policy Committee does decide to hike one more time this week, they should signal that rates are then on hold for a long period – and that the next move is just as likely to be a cut."

Sebastian Vismara, financial economist at BNY Mellon Investment Management
“We think the Bank of England will still hike interest rates by a further 25 bps to 5.5 per cent tomorrow. This could be the last hike given the recent loosening in the labour market and weakening in activity, but we think that risks for rates remain to the upside in the near term. UK wage growth data keeps surprising to the upside relative to the Bank’s forecasts, and core inflation remains high and has been very sticky, at least until recently. Energy prices have surged in the past few months and could increase further. The global economy has been weakening since the last quarter, but not by enough to create much slack. In other words, there remains the risk that this easing in core inflation proves to be another false dawn, and that today’s fall stalls or even reverses in the coming months. The BoE is likely to want to see broader disinflation trends in play before ending its hiking cycle."

Daniele Antonucci, chief investment officer, Quintet Private Bank (parent of Brown Shipley)
“That today’s report on UK inflation surprised to the downside, pretty much across all key measures, supports our view that the Bank of England is not too far from pausing its rate hiking cycle. This is especially remarkable because petrol costs have risen recently.  Importantly, core inflation, excluding volatile components such as food and energy, while still elevated, decelerated.

“There is evidence that higher interest rates are having their intended impact: inflation is falling and activity is slowing. Now the messaging from central bankers is beginning to point to a peak in rates. That is not to say that the inflation battle is won, but the tide is indeed turning. We believe that central banks will keep rates elevated over the coming months to ensure there’s no inflation resurgence. The Bank of England may raise rates once or twice before pausing, depending on the inflation outlook. The important thing though, is that these elevated rates will put pressure on economic activity and then, as it slows, central banks will lower rates in 2024 to support growth.

“As rates peak, bonds become more attractive. Historically, their yields tend to trend in line with central bank rates. Therefore, we believe now is a good time to add longer-dated UK bonds to portfolios to capture this higher yield before it trends lower, while also adding a cushion should the economic outlook deteriorate.”

Lily Megson, policy director at My Pension Expert
“Unexpected easing of inflation might sound optimistic on paper. But savers still face uncertainty. One thing is for sure, however: in the coming months, pension planning will be far from plain sailing – support is urgently required. To help savers successfully navigate these choppy waters, the government must work with financial providers to ensure the right support, such as access to independent financial advice and reliable educational resources, is readily available. Such tools can have a profound impact in helping savers gain a better understanding of their financial situation, empowering them to stay on track with achieving their hard-earned retirement aspirations.”

Mohsin Rashid, CEO of ZIPZERO
“While today’s small drop is another step in the right direction, inflation remains worryingly high. Indeed, in the eyes of consumers, it translates to many more months of struggling to afford essentials. Crucially, cut through the data and we see that food price inflation remains at eye-watering levels, and this is an unavoidable expense for households across the UK. Consumers are long overdue a break: it is time for the government and businesses – especially retailers – to get serious about supporting families with untenable grocery bills. Supermarkets must do more to offer shoppers meaningful savings on their weekly shops, and the government needs to be more vigilant about protecting those shoppers from being taken advantage of. Things are not improving fast enough, so we must act to ensure people in need are not left behind.”

Andy Mielczarek, founder and CEO of SmartSave, a Chetwood Financial company
“With inflation remaining stubbornly high, the money most people have in savings is losing value in real terms. Even though interest rates have risen notably since the end of 2021, and may again tomorrow, millions are not seeing any significant benefits from this. This is because too many banks are still failing to pass better rates onto customers, particularly where easy access and current accounts are concerned. Given inflation is proving sticky, and the base rate could rise again as a result, it is important people consider the best ways to save their money. This means looking at different savings products – such as fixed-term accounts – and shopping around for the best deals on the market."