Will the BoE cut in June?
According to markets at the close of trading yesterday, a June rate cut from the Bank of England is likely. However, priced at just a 58% probability, you can see just how open the ground for the Bank of England’s June meeting remains. For some time now June has been seen as a key month in the Bank’s calendar. There remain some obstacles ahead of that decision that may well tip the scales in either decision to adjust rates lower or hold them steady for another month. Inflation data due for release this week will be one of the key variables analysts in the market and at the Bank alike use to appraise the option of a June rate cut.
The consensus forecast shows headline inflation expected to clock in at just 2.1% on Wednesday. From this headline inflation figure, embarking upon an interest rate easing cycle may be seen as either a no-brainer or well overdue. However, when looking at the core inflation rate, which is expected to record at 3.6% year-on-year, we see the overweight impact that changes in Ofgem’s energy price cap during the observation period are having. That is still not in itself a reason not to start a policy loosening cycle given that much of the initial inflation spike two years ago was commodity price driven. However, what the Bank may be looking more closely at will be services inflation and consumer demand.
As we have discussed before, services inflation may command the attention of policy makers as it shows how input labour prices and consumer demand are performing. This gives a better insight into the dynamics behind price level inflation versus a surface level snapshot. To an extent inflation within services prices strips out some of the volatility created by commodity-exposed items within the calculation. This element of UK inflation data due to be published prior to European market open tomorrow morning could therefore hold the key as to whether we see a June rate cut from the Bank of England. Thanks to a risk-on environment and a weakening Dollar, GBP looks partially overbought against the Euro and US Dollar. Tomorrow’s data could present a challenge to GBP strength if inflation figures present in line or below expectations.
Discussion and Analysis by Charles Porter
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