As of 11 a.m. in London, financial market prices suggested the chances of a rate cut were just 5 percent. At its meeting on Thursday, the BOE cut the bank rate as such measures became more likely. Earlier this week, expectations of an August rate cut also dropped to around 30%.
While the 2% inflation rate is a significant milestone, it has been expected for some time as UK politicians plan their policies ahead of a general election in just over two weeks, and is driven primarily by the sharp year-on-year fall in energy prices. Inflation is expected to fluctuate over the coming months as the downward pressure on energy prices fades.
Policymakers are similarly focused on services inflation, which is key to understanding domestic price pressures in the country’s services-heavy economy, which came in at 5.7 percent, above the 5.5 percent forecast by economists in a Reuters poll.
Core inflation, which excludes volatile components such as energy, food, alcohol and tobacco, was well above the central bank’s long-term average of 3.5%.
“We’re seeing good signs in terms of seasonality, with food prices coming down,” James Sproule, chief economist at Handelsbank, said Wednesday on CNBC’s “Street Signs Europe.”
“But looking at the rest of the year, the Bank of England itself expects inflation to start to edge up again into the autumn,” he said.
“The most worrying thing that a lot of economists like me are looking at right now is the state of services inflation – which is primarily about people’s pay and income – and these figures are proving to be a lot more volatile than we’d like,” Sproul said, adding that the Bank of England aims for services inflation to be around 3%.
He added that it remained unclear whether the Bank of England would cut interest rates in August or September.
Average UK wage growth, excluding bonuses, remains uncomfortably high for the Bank of England At six o’clock% There were signs of easing in the labor market in June.
At its last meeting in May, the central bank said recent inflation readings were “encouraging” but that the possibility of a rate cut would be assessed based on the latest data at each meeting.
Members of the Bank of England’s Monetary Policy Committee, including Governor Andrew Bailey, are likely to be even more quiet than usual on Thursday because of the upcoming national election, but they have stressed that the bank is politically independent and stands ready to cut interest rates if it deems it necessary, with or without an election.
But both the ruling Conservative Party and the main opposition Labour Party have made Britain’s economic performance central to their policies, and the central bank’s actions, or lack thereof, will be closely watched.
At the May meeting, two policy board members voted to cut rates and seven voted to keep them unchanged.
James Smith, developed markets economist at ING, said: It split on Thursday.
“This may contradict the idea that the committee is very close to cutting rates, but the important thing to remember is that the five committee members who hold the key to the first rate cut tend to move in unison,” Smith said in the note. Tuesday, meaning an August rate cut is definitely still on the agenda.
The Bank of England’s decision to keep rates on hold will come after the European Central Bank begins its own course of rate cuts when it meets in June. Headline inflation in the euro zone rose above Britain’s to 2.6% in May, but core inflation has fallen further.
ING’s Smith said economists would be looking closely at messaging from the Bank of England on the liquidity situation and its impact on the economy, as well as any signs that the latest data has shaken the bank’s credibility.
“But listening to Governor Andrew Bailey in May, he seemed keen to proceed with cutting rates. And, somewhat like the European Central Bank, the Bank of England seems more confident in its inflation forecasts than it has been for the past two or three years,” he added.
