UK input costs slide but rate hike bets intact

British firms' costs fell unexpectedly last month while factory gate inflation met expectations, official data showed, providing some relief for policymakers eager to see inflation pressures ease.

Financial markets, preoccupied with concerns over liquidity and credit risks, barely reacted to the figures which did little to change forecasts for one more interest rate hike this year.

However, Bank of England policymakers may be relieved that inflation pressures are easing further up the pipeline.

"Today's numbers provide marginal evidence that the inflationary background may not be as malignant as some on the Monetary Policy Committee may fear," said David Page, an economist at Investec.

The Office for National Statistics said input prices fell 0.5 per cent on the month, the weakest reading since January and confounding analysts' forecasts for a 0.7 per cent gain.

Annual input price inflation eased sharply to stand flat, against expectations for a 1.3 per cent rise.

Output prices rose 0.2 per cent on the month in July for an annual rate of 2.4 per cent. That was broadly in line with analysts' forecasts and came after June's upwardly revised 0.3 per cent gain on the month and 2.5 per cent annual rise.

Any further dovish tone to consumer price inflation, retail sales and wages figures this week could fuel bets that the expected rise in borrowing costs will be delayed as policymakers gauge the severity and impact of current market gyrations.

"We still expect interest rates to reach six per cent this autumn, but we feel there is a growing probability that such a move may be delayed until November," said Howard Archer, an economist at Global Insight.

"The current turmoil in global credit and financial markets also boosts the case for unchanged monetary policy for now."

The central bank has raised interest rates five times since last August to 5.75 per cent and signalled in its quarterly inflation forecasts last week that one more quarter-point hike may be needed to bring headline inflation back to target.