The UK’s Consumer Price Index remained on a track of 2% annual inflation in June’s data for the second month in a row.
Sticking to the Bank of England’s 2% target, markets have started to speculate if the inflation consistency will be enough for an interest rate cut on 1 August when the Monetary Policy Committee makes its next announcement. In the last decision on 20 June, seven members voted to hold rates at 5.25% while two called for a decrease.
Rates were slightly above the market expectation of 1.9%.
Rachel Winter, partner and investment manager at Killik & Co, said: “Stability around the 2% inflation target is cause for a country-wide sigh of relief. This should be evidence enough for the Bank of England to push the button on a rate cut next month.
“The likely blocking factor in the last meeting – the UK general election – has been and gone, resulting in the type of decisive outcome that markets like; the pound has strengthened as a result.”
However, Andrew Summers, chief investment officer at Omnis Investments, argued that the Bank of England may be hesitant to cut before its US counterpart. The Fed opted for a rate hold most recently on 12 June despite a lower than anticipated US CPI inflation reading for May.
“No smoking gun for an August move. Following speeches from the MPC’s Haskell and Pill last week, the odds of a move from the BoE in August reduced somewhat. This dataset is unlikely to turn that around, with the market continuing to focus on the meeting after, in September which is pretty much priced for a 25bps cut,” Summers said.
“It occurs after the US FOMC meets and is priced to deliver their first cut. Investors appear to believe that the BoE will want to wait until their US counterparts move first and it’ll take more than today’s data to change that. The 50bps of cuts priced in the UK by the end of this year is probably fair at this juncture but we believe the risks are skewed to more being delivered.”
While the CPI inflation rate has hit its target, services inflation remained 5.7%. Richard Carter, head of fixed interest research at Quilter Cheviot, said this could be a sticking point for interest rate cuts.
“The good news is that pressures are easing, especially for consumers. Grocery inflation is now at its lowest level in almost three years, and the economic picture is improving. We have also had events come and go last month, specifically Taylor Swift’s UK leg of her world tour, that will have added some volatility to the overall inflation figure for June,” Carter said.
“What happens with core and services inflation will be crucial to watch and will give an indication of just how quickly the Bank of England can act when it comes to normalising monetary policy. Both readings remain much more elevated than the BoE would like and are proving stubborn to bring back down to that 2% level, even if the overall measure of CPI has come down sufficiently. It is these two readings that will prevent the BoE from fully releasing the handbrake and allow the economy to pick up speed.”
