Money market pricing by 11am in London implied just a 5% chance of a Bank Rate cut during Thursday’s BOE meeting – after seeing stronger rates earlier in the week. Bets on the August cut have also been reduced to around 30%.
While 2% inflation is a significant milestone – not least because UK politicians are setting up their stalls ahead of a general election in just over two weeks – it has been expected for some time and was largely driven by a sharp year-on-year rise in prices. drop in energy prices. Pace swings are expected to ease in the coming months as energy fades.
Policymakers are equally focused on services inflation, key to understanding domestic price pressures in the service-oriented economy there, which came in at 5.7%, above the 5.5% forecast by economists in a Reuters poll.
Core inflation, excluding the volatile components of energy, food, alcohol and tobacco, remained well above the central bank’s long-term average of 3.5%.
“We’ve seen some good things in terms of seasonality, food prices are also coming down,” James Sproule, chief economist at Handelsbanken, told CNBC’s “Street Signs Europe” on Wednesday.
“But looking ahead to 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 worrisome thing that a lot of economists like myself are looking at right now is what’s going on in services inflation. That’s largely about people’s wages and earnings. And those numbers have turned out to be a lot stickier than we would like to,” Sproule said. , with the BOE targeting service inflation of around 3%.
He added that whether the BOE will cut rates in August or September remains a close call.
Average UK wage growth excluding bonuses was uncomfortably high for the BOE at 6% in June, although there were signs of an easing in the labor market.
At its last meeting in May, the central bank said recent inflation data was “encouraging” but that the chance of a rate cut would be assessed at each meeting and based on the latest data.
Members of the BOE’s monetary policy committee, including Governor Andrew Bailey, will be more low-key than usual on Thursday because of the upcoming nationwide vote. The institution is politically independent and stressed that it would be willing to enact rate cuts if it felt it was necessary, regardless of the election.
But both the ruling Conservative Party and its main opposition Labor have centered their platforms on the UK’s economic performance, meaning the central bank’s actions – or lack thereof – will be closely watched.
Two MPC members voted to cut rates at the May meeting against seven who voted to hold.
James Smith, ING developed markets economist, expects a repeat which split on Thursday.
“That can be hard 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 members of the committee who hold the key to the first cut tend to move as a pack, ” Smith said in a note Tuesday, meaning an August rate cut remains firmly on the table.
The BOE’s decision to keep rates on hold comes after the European Central Bank began its own tapering path at its June meeting. Eurozone headline inflation was higher than the UK at 2.6% in May, but core inflation cooled further.
Economists will be listening for reports from the BOE on liquidity conditions and their impact on the economy, as well as any signs that bank confidence has been shaken by the latest data, ING’s Smith said.
“But I listened to Gov. Andrew Bailey in May, he sounded like he wanted to continue working to cut interest rates. And a little like the European Central Bank, the BOE seems more confident in its inflation forecasts than it has been in the past.” over the past few years,” he added.