Expectations for BoE June rate cut hurt by lower than expected drop in UK inflation in April

On May 22, 2024

Consumer prices in Britain rose by 2.3% year on year in April, in a sharp decline from 3.2% increase in March and hit the lowest in nearly three years (CPI was at 2.0% in July 2021) but missed expectations for 2.1% increase.

Month on month inflation rose by 0.3% last month, registering significant drop from 0.6% increase in March, but also missed forecast for 0.2% increase.

Core inflation, stripped for the most volatile food, energy and tobacco components, increased by 0.9% month on month in April, compared to 0.6% rise in March and overshot consensus for 0.7% increase.

Annualized core CPI was marginally down from 4.2% in March, showing increase of 3.9% last month and disappointed wide expectations for stronger slowdown (economists expected annualized core CPI to increase by 3.6% in April).

Services inflation, BoE’s key gauge of domestically generated price pressure, ticked down to 5.9% from 6.0% in March, while economists expected it to rise by 5.5%.

Smaller than expected drop in inflation last month, persistently elevated core measure and much higher than expected services inflation, generate fresh negative signals and darken outlook for a rate cut in June, while the latest disappointing data also negatively impact the position of Prime Minister Sunak, ahead of election this year.

The position of the Bank of England became weaker after today’s data, which pushed the central bank one step behind on its way to bring inflation back to 2% target and also hurt bets for June rate cut, as disappointing numbers added to concerns of policymakers that growth in wages would further fuel inflationary pressures, despite the recent data from UK labor sector were in a way mixed.

Although that the latest UK CPI data show that Britain has a lower rate of inflation than the United States and a number of G7 countries, Britain keeps poor rank among the number of Western economies for its inflation record in past couple of years.

British pound jumped to the highest in two months against the US dollar, in immediate reaction to the economic data, which added to hawkish stance and revived the prospect that the British policymakers may opt for unchanged policy in June.

Cable cracked important technical barrier, though sustained break remains required to confirm fresh positive signal of continuation of a larger uptrend.