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Inflation in the United Kingdom was stronger than expected, falling to 2.3% in April, the Office for National Statistics said on Wednesday, prompting traders to withdraw bets on a rate cut by the British central bank in June.
The total fell from 3.2% in March. The April data marked the first time inflation was below 3% since July 2021, putting it within touching distance of the Bank of England’s 2% target.
Economists polled by Reuters had still expected a steeper decline to 2.1%.
Services inflation – a key measure monitored by the Bank of England because it dominates the UK economy and reflects domestic price increases – fell only slightly to 5.9% from 6%. This missed both the Reuters poll and the BOE forecast of 5.5%.
Core inflation, excluding energy, food, alcohol and tobacco, fell to 3.9% in April from 4.2% in March.
Due to the year-on-year fall in energy prices, a dramatic decline in the key interest rate was generally expected. Instead, investors should focus on core and services inflation after BOE policymakers indicated they would be willing to cut interest rates sometime in the summer, but stressed that the timing depends on new data.
Following the release, money markets cut the chance of a rate cut in June to just 15%, down from 50% earlier in the day. The probability of a cut in August was estimated at 40% from 70%.
Reduction in June “unlikely”
Both the core business and services were “disappointing,” said Suren Thiru, economic director of the Institute of Chartered Accountants in England and Wales.
“Ongoing concerns about underlying inflation pressures mean a rate cut in June is unlikely. However, these numbers could convince more rate setters to vote for policy easing, signaling that a summer rate cut is still possible,” Thiru said in a note.
That makes the European Central Bank the next major central bank likely to start cutting interest rates, as its policymakers continue to indicate it will take a big shock to avoid a cut in June. Meanwhile, members of the US Federal Reserve have taken a much more hawkish tone in recent weeks and have pushed back market expectations for an interest rate cut in the US until September at the earliest.
Paul Dales, chief UK economist at Capital Economics, said recent inflation data made a Bank of England interest rate cut unlikely in June and “also raises some doubts about August”.
This was particularly due to strong numbers in the services sector, Dales said in a note, which “suggests that ongoing domestic inflation is easing even more slowly than the BOE had assumed.”
British Prime Minister Rishi Sunak said on social platform X that “inflation is back where it should be.”
Sunak’s ruling Conservative Party has been hoping for signs of an improving economic environment as it lags in the polls ahead of national elections, which must be held before the end of January 2025. The UK economy emerged from a shallow recession in the first quarter of 2025, recording growth of 0.6%.
BOE Governor Andrew Bailey has stressed that regardless of the upcoming election, the central bank will remain politically independent in deciding the timing of the next rate cut.
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2024-05-22 07:16:38
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