UK inflation weakens chances of June rate cut

The 2.3% figure is a significant decrease from March's 3.2%, but market forecasts expected the CPI to reach 2.1%. And official figures from the Office for National Statistics (ONS) show services inflation was 5.9% in April, down from 6% in March.

Inflation has been falling since CPI peaked at 11.1% in October 2022. However, the Bank of England has yet to cut interest rates, raising rates to 5.25% in August 2023, the highest in 15 years. , policymakers indicated that a rate cut in June was possible. Governor Andrew Bailey said a June interest rate cut was being considered but was not a 'fait accompli'.

A week ago, the odds of a June interest rate cut by the Bank of England were around 60% based on overnight index swaps, but have fallen sharply since April inflation data was released.

Bank of England may not cut interest rates in June

What do today's numbers mean for the next Bank of England interest rates meeting?

Tomasz Wieladek, chief European economist at T. Rowe Price, says another rate hike cannot be ruled out.

“There is some evidence that services inflation is gradually falling, but today's data looks set to prevent an inflation cut in June. The MPC reiterated that services inflation will be an important indicator in understanding whether domestically generated inflation is being lowered in a sustainable manner. The MPC wants to cut interest rates based on forecasts released in May but still relies on data. Forecasts have been revised upward several times and the data still surprises the MPC.

“For now, MPC will try to wait until service inflation comes down. But otherwise the MPC may need to be increased again at some point. 'Today's data clearly shows that markets were too optimistic about a rate cut in June, and too optimistic about a BoE rate cut this year.'

Inflation is not falling fast enough

Neil Birrell, chief investment officer at Premier Miton Investors, argues services sector inflation remains a concern.

“Inflation in the UK is following trends elsewhere and has proven more resilient than expected. The Bank of England is not hitting its target as quickly as it would like, which will probably delay its first rate cut. The services sector has proven to be a drag and will remain in focus for banks over the next month or two ahead of a potential rate cut in the summer.”

Zara Nokes, global markets analyst at JP Morgan Asset Management (JPMAM), believes a June cut is currently unlikely.

“While today’s significant decline is welcome news, the Bank of England will be disappointed by the 0.2 percentage point rise in the headline figure. This was largely a result of rising automotive fuel prices, but concerns will still remain about the stickiness of some basic components. Services inflation, a useful gauge of inflation persistence for policymakers on Threadneedle Street, has recently run much hotter than expected.

“Given recent differences of opinion across the committee, an unexpected rise in services inflation could undermine the bank’s confidence that firm inflation pressures are abating. Banks could still come out of the break this summer, but a June cut now looks unlikely. In our view, the June cuts would be premature. If the economy was slowing, you might expect core inflation to be lower than headlines, but recent data shows activity is accelerating again.”

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