High inflation ‘not sufficient’ to scupper Bank of England interest rate cuts
June inflation data showing a 3.4 per cent year-on-year rise in prices would not put Bank of England officials off voting for an interest rate cut in August, leading economists have said.
A Bloomberg poll of City analysts has predicted that inflation will remain above the Bank’s two per cent target as price growth is expected to carry on at a rate of 3.4 per cent for the third month in a row.
But economists have said the Bank is likely to look past sticky inflation and instead move ahead with an interest rate cut in August.
Barclays’ Jack Meaning said the Bank would assess inflation data to be “broadly in line with its expectation” which would “not be sufficient to lead the Monetary Policy Committee (MPC) to deviate from a quarterly rate-cutting path”.
The Office for National Statistics (ONS) is also expected to reveal that services inflation, which is closely monitored by rate-setters, dropped to between 4.4 and 4.6 per cent in June compared to 4.7 per cent in May and 5.4 per cent in April.
Deutsche Bank’s Sanjay Raja, who predicts that inflation will in fact edge up to 3.5 per cent, said June data will show the beginning of an “ascent” this summer while Cathal Kennedy at RBC Capital Markets said the current trend represented a “blip”.
“As long as services consumer price index (CPI) inflation continues to fall in line with the MPC’s expectations, we think it is sufficient for it to continue to ease policy in its current, gradual, manner,” RBC analysts said.
Interest rates threaten growth
Bank of England Governor Andrew Bailey has expressed concern over a weakening in the labour market, with firms laying off more staff and choosing not to re-hire.
Official statistics and independent surveys on the labour market have put Bank policymakers on edge, with initial worries about higher wage growth subsiding amid more reports of layoffs and hiring freezes.
Economists at JP Morgan have also pointed to the risk of food prices increasing further though the rise is unlikely to rattle Bank officials.
The Bank’s next decision on interest rates will come on August 7. This week’s inflation data will be the last set of official price growth results they see before then.
After GDP contracted by 0.1 per cent in the month of May, analysts suggested that the UK economy required a fresh boost to kickstart growth.
“The message to the MPC is that there is little or no growth in the economy and the catalyst for growth will come from falling interest rates,” said Michael Browne, global investment strategist at investment firm Franklin Templeton.
“However, UK rates are falling slowly due to the MPC’s belief that the stimulus from cuts can happen quickly despite the signs saying otherwise.”