A shopper selects fresh produce at a market stall in Kingston, London, England, Monday, May 20, 2024.
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LONDON – British inflation may be about to reach a major milestone, with some predicting a sharp fall in April that will push overall interest rates below the Bank of England’s 2% target.
Economists said that would mean a sharp fall from the current level of 3.2% and could “make or break” a rate cut in June.
The cap on household electricity and gas bills set by the regulator fell by 12% in early April, with the fall largely driven by the energy market.
Wednesday’s reading of less than 2% would be the lowest headline inflation since April 2021 and cool down from a peak of 11.1% hit in October 2022, when UK price rises were the worst of any advanced economy one of.
The country has been hit by a range of inflationary pressures, including persistent labor market tightness, higher import costs due to a weak currency, and higher gas bill increases than elsewhere.
“major”
Capital Economics UK economist Ashley Webb said it would be “significant” if headline rates did fall below 2% in April, as he expected.
“This will be crucial in deciding whether the first 5.25% rate cut comes in June (as we expected) or in August. What is more important is what happens next. We think inflation will fall further, possibly even later down to 1.0% this year,” Weber said in a note Friday.
A Reuters poll of economists showed overall expectations were slightly higher at 2.1%.
Bank of England Governor Andrew Bailey said the latest data was “encouraging” but data released ahead of the June 20 meeting, including two consumer price indexes and two sets of wage growth figures, were crucial.
Ben Broadbent, deputy governor of the Bank of England, said in a speech on Monday that “bank interest rates are likely to be cut at some point in the summer” if inflation continues to be in line with expectations.
As of Tuesday, money market pricing continued to point to only about a 50% chance of a rate cut in June, rising to 73% in August.
Market overreaction?
ING economists expect inflation to hit a “negligible” 2% in April, but to fall below that level in May and remain there for much of the rest of the year. That’s well below the Bank of England’s own forecast for interest rates near 3% by the end of the year.
“If we are right, then this should be a recipe for multiple rate cuts this year. We expect at least three rate cuts, which is slightly higher than what the market is pricing in. But in the short term, there is still some uncertainty about services inflation, ING developed markets economist James Smith said in a note on Monday.
Service sector inflation in April is expected to be 5.5%.
Jane Foley, head of FX strategy at Rabobank, told CNBC via email that the market may have “overreacted” to Wednesday’s low-title article.
“Core and services inflation data are likely to have greater correlation with the timing of the first rate cut this cycle. Assuming services inflation will remain elevated, the central bank may take a cautious approach and still delay rate cuts until August,” Foley said.
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