The recent UK data has revealed that underlying price pressures remain strong, signaling that the Bank of England may delay cutting interest rates. In May, British inflation returned to its 2% target for the first time in nearly three years, and services prices saw a significant increase of 5.7%. This rise in prices has implications for the future policy decisions of the central bank.
Following the release of the data, financial markets adjusted their expectations. The probability of a first rate cut by the BoE in August decreased from 50% to 30%, while the forecast for monetary easing in 2024 also saw a slight decline. The euro experienced a slight dip against the pound, which strengthened by 0.16% to $1.2730.
Despite the data pointing towards a delay in interest rate cuts, analysts are divided on the future actions of the Bank of England. Ruth Gregory, deputy chief economist at Capital Economics, maintains that a rate cut is still possible in August, depending on future data on services CPI inflation and wage growth. On the other hand, Jamie Dutta, a market analyst at Vantage, predicts that the BoE will hold off on any rate decisions in the near future.
The general election scheduled for July 4 adds another layer of uncertainty to the situation. Some analysts believe that the election may impact the central bank’s decision-making process and could potentially delay any significant changes to its forward guidance. Despite this, the majority of economists polled by Reuters still expect the BoE to start easing its monetary policy in August, with further reductions anticipated later in the year.
Overall, the recent UK data has provided insights into the current state of the economy and the potential actions of the Bank of England. While strong price pressures suggest a delay in interest rate cuts, the upcoming election and additional data points will play a crucial role in shaping future monetary policy decisions. Analysts and market participants will closely monitor these developments to gauge the direction of interest rates and the impact on currency markets.