Investors increased their bets on the Bank of England stopping its historic run of interest rate hikes as soon as Thursday after the surprisingly high inflation rate in Britain unexpectedly declined in August.

Consumer price index fell from July’s 6.8% to 6.7% on Wednesday, the lowest level since February 2022, contrary to predictions by economists surveyed by Reuters and the BoE anticipating an increase.

Sterling dropped by over half a cent to its lowest level versus the U.S. dollar and the euro since May.

Investors gave the BoE’s decision to freeze interest rates on Thursday, following 14 consecutive hikes dating back to December 2021, an almost 50/50 chance.

According to the Office for National Statistics, the decline was caused by lower than expected food prices and a decline in fluctuating hotel and airfare costs.

That lessened the impact of rising fuel costs and alcoholic beverage taxes.

The BoE predicted last month that inflation would reach 7.1% in August before steeply declining to roughly 5% in October, which would still be more than its 2% objective.

The majority of investors had predicted that the BoE will increase interest rates for the fifteenth consecutive time on Thursday, raising the Bank Rate to 5.5% from 5.25%.

In light of the inflation numbers, that appeared to be considerably less certain. Investors had increased their odds of the BoE suspending its rate hikes on Thursday from 20% before the inflation data was released to approximately 47% at 0700 GMT.

However, several economists suggested that the statistics might not force the British central bank to alter its course.

“The inflation figures may not sway the Bank of England away from raising interest rates tomorrow,” Yael  Selfin, chief economist at KPMG UK, said.

“There are renewed concerns about the price of oil, which has risen by over 25% since June, and potential pressures on global food prices. These could not only slow the disinflation process further but also reverse the decline in inflation expectations, causing further worry for the Bank of England.”

In August, only Iceland and Austria had higher inflation rates in Western Europe than Great Britain.

However, core inflation, which excludes volatile food and energy prices, decreased more than the headline rate, from 6.9% in July to 6.2% today. A figure of 6.8% was predicted by the Reuters poll for August.

The BoE is also closely monitoring the service sector in Britain, where price rise slowed to 6.8% in August from 7.4% in July.

The most recent results were welcomed by the Rishi Sunak government as well as offering some solace to the BoE, which has faced criticism since inflation hit 11% last October. Before an anticipated election in 2024, he has pledged to cut inflation in half this year.

“Today’s news shows the plan to deal with inflation is working – plain and simple,” finance minister Jeremy Hunt said.

“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 sustainably higher growth.”

He appeared to take a shot at the opposition Labour Party, which is doing well in surveys, when he warned that Britain could not afford to continue on a “borrowing binge.”

(Adapted from Investing.com)