By Matthew Ryan

Inflation in the UK is proving stubbornly resilient, running at almost double the Bank of England’s 2% target — although today’s unexpected deceleration will certainly be greeted with relief.

The Monetary Policy Committee (MPC) is ‘between a rock and a hard place’. The slowdown in the UK labor market essentially calls for further cuts in the key interest rate, but high levels of inflation call for caution. We estimate that most Bank officials will likely need more evidence to confirm that inflation has indeed peaked, but today’s data is at least a step in the right direction.

We do not expect a rate cut in November, as we consider it essentially unrealistic. Markets now see a tapering in December as more likely, however we remain cautious and believe that persistently high inflation may delay any further easing of monetary policy until at least February.

Undoubtedly, the implications of the budget could turn things around, as a high-tax, anti-growth budget could prompt a softer stance from the Commission in 2026 — which could put pressure on sterling.

* Matthew Ryan is Head of Market Strategy at international payments firm Ebury