Money market pricing at 11am in London implied just a 5% probability of a bank rate cut at Thursday’s BOE meeting – after registering stronger odds earlier in the week. Bets on an August cut were also cut to around 30%.
While 2% inflation is an important milestone – not least as UK politicians set out their positions ahead of the general election in just over a fortnight – it has been expected for some time and has been largely driven by the sharp year-on-year figures. drop in energy prices. Fluctuations in interest rates are expected in the coming months as the energy impact diminishes.
Policymakers are also focused on services inflation, which is key to understanding domestic price pressures in the country’s service economy, which stood at 5.7% – higher than the 5.5% economists had forecast in a Reuters poll.
Core inflation, excluding the volatile components energy, food, alcohol and tobacco, remained well above the central bank’s long-term average at 3.5%.
“We’ve seen good things on the seasonality front, food prices are also coming down,” James Sproule, chief economist at Handelsbanken, told CNBC’s “Street Signs Europe” on Wednesday.
“But looking at the rest of the year, even the Bank of England itself expects inflation to rise again in the autumn,” he said.
“I think the most worrying thing that a lot of economists like me are looking at right now is what’s happening in terms of services inflation. This is largely about people’s salaries and earnings. And those numbers have proven to be a lot more persistent than we would like,” Sproule said. , with the BOE targeting services inflation of around 3%.
Whether the BOE will cut rates in August or September remains exciting, he added.
Average UK wage growth excluding bonuses remained uncomfortably high for the BOE at 6% in June, although there were signs of a easing in the labor market.
At its last meeting in May, the central bank said recent inflation figures were “encouraging” but that the likelihood of a rate cut would be assessed at each meeting based on the latest data.
Members of the BOE’s Monetary Policy Committee, including Governor Andrew Bailey, will be more tight-lipped than usual on Thursday because of the upcoming national vote. The institution is politically independent and has emphasized that it would be willing to implement a rate cut if it believes one is necessary, regardless of whether elections take place.
But both the ruling Conservative Party and its main opposition Labor party have focused their platforms on Britain’s economic performance, meaning the actions of central banks – or lack thereof – will be closely watched.
Two members of the MPC voted in favor of an interest rate cut during the May meeting, compared to seven members who voted in favor of an interest rate cut.
James Smith, developed markets economist at ING, expects a repeat of this crisis which broke up on Thursday.
‘That may be difficult to reconcile with the idea that the committee is very close to an interest rate cut. But the important thing to remember is that the five internal committee members who hold the key to the first cut tend to move as a pack. Smith said in a note On Tuesday, an interest rate cut in August would remain firmly on the table.
A decision by the BOE to keep rates on hold would come after the European Central Bank started its own path of cuts at its June meeting. Headline inflation in the eurozone was 2.6% higher than in Britain in May, but the core figure has cooled further.
Economists will listen to reports from the BOE on liquidity conditions and their impact on the economy, as well as any indications that the Bank’s confidence has been shaken by the latest data, ING’s Smith said.
“But when he listened to Governor Andrew Bailey in May, he sounded like he was keen to continue cutting rates. And like the European Central Bank, the BOE appears to be more confident in its inflation forecasts than it has ever been. over the past few years,” he added.