LONDON – Britain had some reason to celebrate on Wednesday morning, with headline inflation hitting the Bank of England’s 2% target for the first time in nearly three years.
But the print only further convinced Traders do not believe a rate cut is imminent.
As of 11am, London money markets were pricing in a mere 5% chance of a rate cut during Thursday’s Bank of England meeting – a higher likelihood had been recorded previously earlier this week. Bets on a rate cut in August have also been trimmed to about 30%.
While the 2% inflation figure is an important milestone – especially as UK politicians square off ahead of a general election in just over two weeks – the figure has been anticipated for some time and is driven largely by year-on-year inflation. driven by substantial growth. Rates are expected to be volatile in the coming months as the energy drag subsides.
Policymakers are also concerned about services inflation, which is key to understanding domestic price pressures in the country’s services-oriented economy, which stood at 5.7%, higher than the 5.5% forecast by economists in a Reuters poll.
Core inflation, which excludes volatile components such as energy, food, alcohol and tobacco, remains well above the central bank’s long-term average of 3.5%.
“We’re seeing some good news on the seasonality front and food prices are coming down,” James Sproule, chief economist at Handelsbanken, told CNBC’s “Signpost Europe” on Wednesday.
“But looking at the rest of the year, even the Bank of England itself expects inflation to start rising slightly again in the autumn,” he said.
“I think the most troubling thing that a lot of economists like me are looking at right now is what’s happening in services inflation. That’s largely to do with people’s wages and income. It turns out the numbers are higher than we hoped. It’s much stickier,” Sproul said. , the Bank of England set the services industry inflation target at around 3%.
He added that it was still a close call whether the Bank of England would cut interest rates in August or September.
BoE average salary growth excluding bonuses remains at disturbingly high levels At 6 o’clock% In June, despite signs of labor market easing.
At its last meeting in May, the central bank said recent inflation data was “encouraging” but that the likelihood of a rate cut would be assessed at each meeting based on the latest data.
Are you playing in August?
Members of the Bank of England’s monetary policy committee, including Governor Andrew Bailey, will be more tight-lipped than usual on Thursday due to the upcoming national vote. The institution is politically independent and has Emphasizing that if a rate cut is deemed necessary, it will be willing to implement it regardless of the election.
But both the ruling Conservative Party and its main opposition Labor Party have focused their platforms on the UK’s economic performance, meaning the central bank’s actions (or lack thereof) will be closely watched.
Two members of the Monetary Policy Committee voted to cut interest rates at its May meeting, while seven members voted to keep rates unchanged.
ING developed markets economist James Smith predicts, Break up on Thursday.
“This may be difficult to reconcile with the idea that the committee is very close to cutting rates. But the key thing to remember is that the five internal committee members who hold the key to the first rate cut tend to act collectively,” Smith said in a note. Tuesday, meaning an August rate cut remains firmly on the table.
The Bank of England will decide to keep interest rates on hold after the European Central Bank begins its own path of rate cuts at its June meeting. The overall inflation rate in the Eurozone was 2.6% in May, higher than that in the UK, but the core data cooled further.
ING’s Smith said economists will be closely watching for information from the Bank of England on liquidity conditions and their impact on the economy, as well as any hint that the bank’s confidence is shaken by the latest data.
“But listening to what Governor Andrew Bailey said in May, it sounds like he’s keen to get on with cutting rates. A bit like the European Central Bank, the Bank of England seems more confident in its inflation forecasts than before .
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