The decision by the Bank of England whether to raise interest rates tomorrow for a 15th time in a row is “on a knife-edge” and a “50/50 call” after today's surprise fall in inflation, according to economists.
Figures from the Office for National Statistics (ONS) showed the consumer price index rose by 6.7% in August, down from 6.8% in July, and well below City expectations for a rise to 7.0% and the BoE’s own prediction of 7.1%.
Core CPI (excluding energy, food, alcohol and tobacco) rose by 6.2% in the 12 months to August, down from 6.9% in July, again below City expectations of 6.8%.
The drop reflected falls in food prices, air fares and accommodation services, which offset a jump in fuel costs.
The inflation surprise has raised speculation that the BoE could leave interest rates unchanged tomorrow.
Kallum Pickering, senior economist at Berenberg, thinks tomorrow’s decision by the central bank whether to raise interest rates is on a "knife-edge".
He pointed out the market for overnight index swaps, which had dramatically cut its bets for the peak bank rate in recent weeks (from a high of 6.5% in early July), has now lowered its bet on a further final 25 basis point (bp) hike to a c50% chance from a virtual certainty yesterday.
But he still reckons policymakers will sway towards one more hike to 5.5% while providing a strong signal that further hikes are unlikely as long as inflation continues to trend lower.
At Deutsche Bank, senior economist Sanjay Raja said he now thinks "the case for a pause is slightly stronger. But either outcome won't surprise us tomorrow."
He said today's inflation data "will likely raise the odds of a dovish pivot to the Bank's forward guidance tomorrow" and crucially, Raja and his team "don't think the hiking cycle is over just yet.
"A skip tomorrow, doesn't necessarily mean that the MPC is out of the woods. Despite weaker price pressures in August, price pressures further out are building," he said.
James Smith, developed markets economist at ING Economics, said: “We're still tempted to say the Bank of England will hike rates tomorrow” but added that “it's a close call, and both wage and inflation data suggest the end of the current tightening cycle is very close to its conclusion”.
"We could get a couple more members voting for a pause, and either way a rate hike tomorrow – if it comes – is likely to be the last," he said.
But Goldman Sachs (NYSE:GS) has changed its view and now thinks the BoE will leave interest rates unchanged after the inflation figures surprised “meaningfully to the downside”.
“Combined with their recent dovish commentary, we now expect the MPC to keep Bank Rate unchanged tomorrow and lower our forecast for the terminal policy rate to 5.25% (from 5.5% before),” the investment bank said.
Goldman now expects core and headline inflation to be 5.5% (vs 6.0% previously) and 4.4% (vs 4.7% previously), respectively, by the end of the year.
Simon French, chief economist at Panmure Gordon, said this was "very important data for the MPC's deliberations and holding rates this week looks now a materially under-priced outcome".