UK Services Inflation Softens, Increasing Chances of Bank of England Rate Cut in Q4; GBP/USD Dips
By Bob Mason | Published: September 17, 2025, 06:16 GMT
UK inflation data now shows that prices in the services sector fall. This drop may push the Bank of England to cut rates. The British pound moves oddly against the US dollar as markets watch the BoE’s next step.
UK Inflation Data Highlights
In August 2025, UK services inflation moves down to 4.7% from 5.0% in July. This drop points to easing price rises in a sector that holds over 70% of the country’s GDP. Core inflation, which leaves out energy, food, alcohol, and tobacco, falls from 3.8% in July to 3.6% in August. At the same time, the yearly headline Consumer Price Index (CPI) stays at 3.8%.
Data from the Office for National Statistics shows the CPI for owner-occupiers’ housing costs (CPIH) rises 4.1% over the past year to August. This is slightly lower than the 4.2% rise in July. Air fares pull the rate lower, while restaurant, hotel, and motor fuel prices push it up. Core CPIH also drops a bit from 4.2% to 4.0% in August.
Implications for Bank of England Policy
The fall in services inflation, and especially in core prices, may shape the BoE’s next choices. Past fears of high services inflation kept rate cuts at bay. New numbers now might show a different path.
Yet, the economy shows mixed signs. Early September data show wages rise at a faster pace. Average earnings, including bonuses, climb to 4.7% in the three months to July, up from 4.6% in June. The unemployment rate stays at 4.2%, a sign of a tight job market that keeps demand and prices near their levels.
Economists see a split in the upcoming BoE meeting on September 18. Two votes stand ready to lower rates while seven votes hold at 4%. Market scouts watch these numbers. More votes for a cut could push up the chance for a move in November. A clear rate cut will depend on a faster drop in inflation and wage gains in the September reports.
ING Economics notes: "Private sector jobs fell more in August. This may push wage growth below 4% by year-end. That route may allow a BoE cut, though our call for a November drop still hangs in question."
GBP/USD Reaction
After the new inflation numbers came out, the GBP/USD pair shows soft moves. It drops to 1.36369 before the news, then rises briefly to 1.36589 early Wednesday. When the numbers come out, the pair edges to 1.36526 and settles near 1.36419. By mid-morning on September 17, the pair sits close to 1.36456. This calm shows market care amid mixed signals.
Economic Data to Watch and Market Outlook
Investors now watch the BoE decision on September 18 very closely. Soon, UK retail sales will appear on September 19 while the Services Purchasing Managers’ Index (PMI) comes on September 22. These numbers will play a role in the Bank’s view and steps ahead.
UK retail sales are expected to rise by 0.4% in August after a 0.6% move in July. Good retail data may lessen the chance for easing in the fourth quarter, but weak numbers may give more room for a rate drop.
The Services PMI is seen to fall from 54.2 in August to 51.7 in September. A clear slowdown in services, along with some job cuts and lower price changes, might support a rate drop in November.
Conclusion
The drop in UK services inflation ties into important choices for the Bank of England as it finds a balance between holding down inflation and supporting growth. Wage trends stay a worry, but the softer numbers raise the chance for a rate cut in the last quarter of 2025. Traders now watch for upcoming data and clear signals from the BoE on its next steps.
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About the Author:
Bob Mason is an experienced financial reporter with over 28 years covering currencies, commodities, and stocks across European and Asian markets. He has worked at global rating agencies and large banks, giving clear views on world market trends.
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