Written by Millan Chauhan

The UK Consumer Price Index (CPI) slowed to 6.7% in the twelve-months to August 2023, with this inflation print below market expectations of 7.0%. The encouraging signs of slowing inflation did come as a surprise to markets and led to an initial sell off in Sterling and a dampening of forecasts for an interest rate hike by the Bank of England (BoE). Subsequently, the BoE Monetary Policy Committee narrowly voted 5-4 to keep interest rates at 5.25%, with four of those members voting to increase rates by 0.25%. The BoE also stated that it expects CPI inflation to fall significantly in the near term following lower annual energy price inflation and further declines in food price inflation.

The Federal Reserve kept interest rates at the target range of between 5.25%-5.5% following its meeting last week, having raised interest rates by 0.25% in July 2023. The Federal Reserve also signalled its outlook for its target funds rate, which is expected to peak at between 5.5%-5.75%.  This equates to one further 0.25% interest rate hike this year with rate cuts expected from 2024 onwards. US Inflation accelerated to 3.7% in the twelve-months to August 2023, up from 3.2% in the twelve-months to July 2023. The largest contributions to this print were rising energy prices and housing related costs.  The perception that rates could stay higher for longer led equity markets to decline over the week.

Elsewhere, the Governor of the Bank of Japan, Kazuo Ueda stated that Japan is yet to see inflation settling at its 2% target range and decided to keep its short-term interest rate at -0.1%. Japan’s Core CPI rose by 3.1% in the twelve-months to August 2023. Following this announcement, the Japanese Yen sharply fell towards ¥148 per dollar and there are expectations that the Japanese authorities may step in if the Japanese Yen continues to weaken.


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