After UK inflation fell in September to below the Bank of England’s target, wealth managers discuss the timing of another potential interest rate cut.

UK annual headline inflation came in at 1.7 per cent in September, the lowest since April 2021 and below expectations of 1.9 per cent, according to data from the Office for National Statistics.

The figures are below the Bank of England’s (BoE) 2 per cent target rate. Year-on-year core inflation – which excludes volatile food and energy – also fell to 3.2 per cent, below expectations of 3.4 per cent. Services inflation dropped too from 5.6 per cent last month to 4.9 per cent.

The figures come after the Bank of England’s narrow 5 to 4 vote to deliver its first interest rate cut of 25 basis points at the start of August to 5 per cent.

Here are some reactions to the news from investment managers.

Isaac Stell, investment manager, Wealth Club
“The Bank of England can breathe a sigh of relief as inflation, at long last, has fallen below its 2 per cent target, vindicating the steady interest rate cut path they have been treading. The door has swung wide open to the possibility of a rate cut at the November meeting, with perhaps a larger-than-expected cut not entirely off the cards. Andrew Bailey stated this month that the BoE could be "a bit more aggressive" if the news on inflation continued to be good. The latest figures would beg the question, how much better does it need to get? 

“With declining private sector wage growth, falling prices, and a government focused on tax rises, an easing of the burden for the public will be welcome. Will the BoE play with a straight bat or will they look to go big and swing for the boundary? Today’s numbers suggest they could well do the latter.”

Isabel Albarran, investment officer, Close Brothers Asset Management
“Recent guidance from the Bank of England has been rather confusing. While the September statement made it clear that a November cut was on the table, it placed a clear emphasis on slow and gradual easing. Chief economist Huw Pill’s comments on the upside risks to inflation persistence have supported this gradual approach, especially in the context of continuing sticky services inflation. But recent comments from governor Bailey, saying the pace of cutting could be more aggressive, confused the market.  

“Markets are still pricing in one to two cuts by year-end, but the real shift has been in currency sentiment. Since this mixed messaging from Bailey, we’ve seen sterling weaken more than rates markets, largely reflecting anxiety ahead of the budget rather than any major reassessment of rate cut expectations in the UK. Unfortunately, yesterday’s Government Investment Summit does not seem to have boosted sentiment towards the currency significantly. We expect greater clarity at the November monetary policy committee (MPC) meeting, following the October budget, when new forecasts will shed light on what sort of growth trajectory the BoE is anticipating for the UK.”

Andrew Phillips, managing director, V12 Retail Finance
"With inflation now well beneath the Bank of England’s 2 per cent target, this all but guarantees a second rate cut at the November meeting. For over three years, consumers have faced persistently high inflation, exacerbating the cost-of-living crisis. The Bank of England’s aggressive tightening in response to soaring prices has strained the economy, curbing consumer borrowing and confidence. This has impacted everything from groceries and retail to major sectors like housing and car ownership. 

“Today’s inflation figures will bring relief not only to the Bank of England and the Treasury, but to consumers and businesses as well. After a difficult few years, we can expect a gradual reduction in interest rates, with the Bank's base rate likely settling around 3 per cent – a far cry from the near-zero levels of the quantitative easing era but significantly lower than recent highs." 

Hetal Mehta, head of economic research, St James’s Place
“The fall in UK inflation is very broad-based, and for the BoE, the core inflation and services inflation numbers in particular will be good news. They should consolidate the expectations of a cut in November and perhaps the vote split will narrow. As for back-to-back cuts, I think more evidence of a continued decline in inflation is needed before we see this and suspect the BoE will also want to have more time to digest the budget announcements.”

Luke Bartholomew, Jonny Black, abrdn
“This is a very encouraging inflation report for the Bank of England. In particular, the sharp fall in services inflation will help reassure policymakers that underlying inflation pressures are fading, even if the headline rate is likely to pick up again before the end of the year. A 25 bps rate cut in November is now effectively a done deal, and this report certainly makes the path to a consecutive cut in December much clearer. However, the Bank will probably want to assess the impact of the Budget before signalling a shift to a more rapid pace of easing.”  

“This is a promising sign for rate setters. Andrew Bailey has hinted that if the positive inflation trend continues, we could see a bolder approach to cutting interest rates. But with the geopolitical landscape remaining turbulent, there’s risk of volatility that could lead to sharper price rises. Advisors remain essential. Their counsel will help clients to feel confident that their strategies can weather any storm,” Jonny Black, chief commercial and strategy officer at abrdn Adviser, added. 

Patrick O'Donnell, senior investment strategist, Omnis Investments
“That’s a big fall in services inflation, below consensus estimates. Along with the easing of private sector wage growth yesterday, it’ll please the Bank of England. The market was already pretty convinced of a 25 bps cut at the next meeting in November anyway. However, with services inflation still running well above long-run averages, we’ll need to see an acceleration of the trend, or an exogenous market shock for the BoE to follow up with another cut in December. There isn’t a shortage of potential shocks right now though, with a much-anticipated budget, a close US election and ongoing elevated geopolitical risks.”

Rachel Winter, partner at Killik & Co 
“The return to below-target inflation for the first time since 2021 suggests that the Bank of England’s tactics have worked almost too well. But we should not take stability as a fait accompli – with the UK budget and the US presidential election now less than a month away, market volatility in the short term remains likely. Both these events could affect the exchange rate between the pound and the dollar, and this could have an impact on UK inflation. The UK is heavily reliant on imports, and these imports become more expensive when the pound is weak, and cheaper when it is strong. Against this difficult landscape, the Bank of England needs to balance a complex cocktail of factors before voting for more interest rate cuts. For investors, the ongoing uncertainty underscores the need for a well-balanced portfolio. As volatility persists, diversification remains critical to mitigate risks from sector-specific disruptions.”