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London Markets: Interest-rate hike expectations still elevated after U.K. inflation unexpectedly slows

This article misstated the yield levels on the 2-year gilt.

Interest-rate expectations took only a minor hit on Wednesday after a softer-than-forecast reading on inflation.

Consumer prices rose 3.1% year-over-year in September, a tick below both expectations and the August reading, the Office for National Statistics reported. The core inflation reading also slowed, to 2.9% from 3.1%.

According to the CME Bank of England watch tool, the probability of a rate hike in November cooled to 32% from 59%, but expectations the central bank will move rates higher by December were still north of 70%.

The yield on the 2-year gilt
TMBMKGB-02Y,
0.698%

eased to 0.69% from 0.73%. The pound
GBPUSD,
-0.29%

slipped to $1.3760 from $1.3792.

“Amid broad-based price increases across major components of the inflation basket, the dip in the September annual rate is partly due the base effect of the rise in hotels and restaurant prices a year earlier after August 2020’s Eat Out to Help Out Scheme ended,” said Kallum Pickering, senior economist at Berenberg.

Hann-Ju Ho, senior economist at Lloyds Banking Group, was one of several who still expects prices to accelerate. “The increase in the energy price cap will pull inflation higher in October, with a further significant rise likely next April as a result of soaring wholesale gas prices. That means that inflation seems set to remain around 4% into the second quarter of next year. It will present the [Bank of England monetary policy committee] with a difficult policy trade-off between supporting the economy and tackling inflation,” he said.

The FTSE 100
UKX,
+0.03%

wasn’t moving much on Wednesday, with metals producers including Rio Tinto
RIO,
-3.45%

falling.

Travel stocks such as International Airlines Group
IAG,
-3.99%

and Tui
TUI,
-5.38%

lost ground on worries the U.K. may have to re-impose restrictions as COVID-19 infections rise.

Energy providers SSE
SSE,
+2.11%

and Centrica
CNA,
+3.38%

advanced amid the strength in wholesale power prices.

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