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Bank of England expected to delay rate cut
2024-07-23
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Official data showed that the UK inflation rate remained stable in June after returning to the 2% target level set by the Bank of England in May. Analysts pointed out that at present, the core inflation and service inflation levels in the UK are still high, and the wage growth rate is strong. The prospect of the Bank of England starting to cut interest rates in August is questionable.
Inflationary pressure still exists
Data released by the UK National Statistics Office recently showed that the consumer price index (CPI) in June remained at 2.0%, slightly higher than the market expectation of 1.9%. In May this year, the UK inflation rate fell back to 2%, the target level of the Bank of England, for the first time in nearly three years.
The core inflation rate in the UK in June, excluding energy, food, alcohol and tobacco prices, was 3.5%, which was also the same as the figure in May.
The UK service industry inflation rate remained at 5.7% in June. The service industry occupies a dominant position in the UK economy. This data reflects the trend of rising domestic prices and is closely watched by the Bank of England.
"Hotel prices rose strongly and the cost of used cars fell, but the decline was lower than the same period last year." Grant Fitzner, chief economist of the UK National Statistics Office, said: "However, falling clothing prices pulled down inflation and widespread sales reduced costs."
The data also showed that the cost of raw materials and factory goods in the UK fell month-on-month in June, but still rose year-on-year.
Recently, there are other economic data that show that inflation may remain stubborn. The Bank of England has made it clear many times that the UK inflation data in the second half of this year may reverse the downward trend in the first half of the year, and inflationary pressure will increase again.
Official data from the UK showed that in the three months ending at the end of May, average weekly earnings excluding bonuses increased by 5.7% compared with the same period last year. Although the growth rate has slowed down, it is still at a high level. This data is one of the key indicators of the Bank of England to measure inflationary pressure.
Like many other economies, the UK labor market has remained strong despite slow economic growth. The combination of strong wage growth and slowing overall inflation has led to the largest increase in real wage growth in the UK since 2002 (excluding the epidemic period).
The probability of an August rate cut is reduced
As demand recovers, inflation in the UK has accelerated, and the inflation rate has continued to soar after the Ukrainian crisis caused energy prices to rise. The Bank of England began to raise interest rates several times at the end of 2021 to fight inflation. Despite the slowdown in inflation in May, the Bank of England maintained its key interest rate at a 16-year high of 5.25% in June.
Analysts said that the latest inflation data may cause the Bank of England to wait and see for a while before cutting interest rates. There are still some key data to be released before the monetary policy decision in August.
"The possibility of an August rate cut has been further reduced." Paul Dales, chief UK economist at consulting firm Capital Economics, said that the forecast for the first rate cut by the Bank of England has been postponed from August to September, mainly because the latest data reflects greater potential inflationary pressures.
The futures market believes that the probability of a 25 basis point rate cut at the Bank of England's monetary policy meeting on August 1 is 40%, which is significantly lower than 60% in early July. The market also expects that in the next six months, the UK interest rate level is expected to fall to around 4.60%, while the US interest rate level is expected to fall to 4.25% to 4.75%.
Analysis pointed out that investors expect that the Bank of England is less likely to cut interest rates in August, while the Federal Reserve is more likely to cut interest rates as early as September, and the Bank of England will cut interest rates relatively slowly. These factors will drive the pound to strengthen.
Last week, the pound-dollar exchange rate broke through the 1-pound-to-dollar mark for the first time since July last year, and has risen by about 2% so far this year, and the increase in the whole of last year was 5.3%. The pound-to-euro exchange rate has also shown a strengthening trend, and has risen by about 3% in 2024, reaching its highest level in nearly two years.
Economy faces challenges
The British economy has been trapped in the dilemma of high inflation and low growth in recent years, and the cost of living for the people is high. High interest rates have exacerbated the cost of living contraction in the UK because it increases borrowing costs, reduces household disposable income and suppresses economic activity.
The newly elected Labour government in the UK welcomed the fact that inflation remained at the Bank of England's target level in June.
"It is welcome that inflation remains on target," Darren Jones, chief secretary to the Treasury, said in a statement. "But prices remain high for families across the UK... That's why this government is making difficult decisions to repair the foundations of the UK economy."
The new Labour government, led by new British Prime Minister Keir Starmer, has pledged to take immediate action to boost economic growth and ease the cost of living crisis. The Labour government's economic measures include tightening regulations governing businesses and introducing a law to ensure that all government budgets are independently reviewed in advance.
The Labour government also said that it would "build Britain up" and would set up relevant funds and amend regulations to promote the construction of new houses and infrastructure.
King Charles III of the United Kingdom announced in his speech that stabilizing the UK's public finances and stimulating economic growth are at the core of the new prime minister's legislative agenda.
Some analysts believe that the UK's fiscal situation remains worrying. As the size of the UK's public debt is expected to exceed 100% of gross domestic product (GDP), the government will have very limited room to increase taxes or cut spending.
However, the UK's economic growth has shown a certain recovery trend. The UK economy grew by 0.7% quarter-on-quarter in the first quarter of this year, the fastest growth since the fourth quarter of 2021. After zero growth in April, UK GDP grew by 0.4% in May. Last week, the International Monetary Fund (IMF) raised its forecast for UK economic growth this year to 0.7% from 0.5% in April.
The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.
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