Could falling inflation and a soft jobs market lead to lower interest rates in UK?

The headline non-farm payroll figure came in significantly ahead of estimates, driven by private payrolls. US non-farm payrolls came in at 254,000 in September, up from 159,000 in August. The unemployment rate was 4.1% that month versus 4.2% in August.

Average hourly earnings increased by 0.4% in both September and August. Yet, the higher-than-expected rise has raised concerns about persistent inflation.

Earlier this year the expected soft landing of the US economy was brought into doubt because of weak jobs data announced in July. This led to some volatility in the markets, however, positive jobs figures reported in September have brought more stability and confidence in the strength of the US economy.

This stronger-than-expected payroll data has reduced the odds of a 50-basis point interest rate cut at the Federal Reserve’s (Fed’s) November meeting. Instead, we predict a staggered approach with two 25-basis point interest rate cuts this year.

September's Consumer Prices Index (CPI) measure of inflation was 1.7%, down from 2.2% in August. But, core inflation, excluding food and energy, was 3.2%. Services inflation hit 4.9%.

The biggest drop in the monthly CPI rate came from transport due to lower airfares and motor fuel prices. However, food and non-alcoholic drinks pushed the CPI rate up. The bond market has remained concerned about high core inflation, especially in services, which have been above 5% since June 2022.

For some time now the UK has faced stickier inflationary pressures when compared with other advanced economies, but with this fall we could see the Bank of England (BoE) be more aggressive in cutting interest rates.

There were other concerns too, which support a cut in interest rates. UK labour market data showed further softening in the jobs market. Wage growth continued to slow while the number of job vacancies declined from 856,000 to 841,000.

Earlier in October, Andrew Bailey, the Governor of the BoE said the bank could be a “bit more aggressive” in its rate cutting cycle. It’s now expected there will be a quarter-point cut at each of the next three monetary policy meetings.

If you have any questions about how these announcements can impact your portfolio and investment decisions please contact your adviser.