US interest rate cut likely after falling inflation | Business News

Annual inflation in the US fell to 2.9% last month, officials said – raising expectations that the Federal Reserve will cut interest rates in September.

The value, lower than the 3% in June, is the lowest since March 2021 and was below market expectations.

Analysts widely predict that lower U.S. inflation will almost certainly spur the Fed to cut interest rates next month for the first time since March 2020.

The US central bank kept rates stable in the range of 5.25% to 5.50% since last July.

Any action by the Fed is likely to influence the Bank of England, which reduced interest rates earlier this month for the first time in more than four years.

EU and UK policymakers prefer not to be too out of step with the US due to concerns about factors such as the impact on currency strength.

It also comes later UK inflation rose slightly to 2.2% in July, the first increase in six months.

However, the Bank of England It is still expected to cut interest rates again this autumn, with markets predicting that there is almost a 90% probability of a reduction in November.

Read more: What could rising UK inflation signal?

Wednesday’s US figures also revealed that the monthly consumer price index (CPI) of inflation rose 0.2%, as expected, after falling 0.1% in June.

Annual underlying inflation – which excludes volatile food and energy prices – was 3.2%, also as forecast.

Following the release of the data, financial markets in the US predicted that there was now more than a 60% probability that the Fed would cut interest rates by 0.25 percentage points in September.

The probability of a cut greater than 0.5 percentage points was estimated at 39.5%.

Before the inflation data was released, markets were predicting that the probability of a 0.25 or 0.5 percentage point cut was almost 50-50.

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Economist Paul Ashworth of research firm Capital Economics said: “Overall, the July CPI report is probably best described as moderately encouraging – it adds support for a 25bp rise.” [basis point] cut rates in September, but at the same time does not suggest that price pressures are collapsing in a way that would justify a reduction of more than 50 basis points.”

Jack McIntyre, of investment firm Brandywine Global, said: “We don’t know if it will be 25 or 50 [basis points cut]But I don’t think inflation will determine that.”

He added that new labor market statistics in the coming weeks will likely have an even greater impact on the Fed’s thinking.