Is a UK rate cut more likely now UK inflation is back to 2%?
Politicians and central bankers will be pleased that UK inflation has returned to 2% according to the latest data, but does that make a rate cut more likely?
What to expect from the Bank of England meeting?
The Bank of England (BoE) is widely expected to keep interest rates unchanged at 5.25% when it meets on Thursday. Forecasts show around a 90% chance of no rate change.
A few months ago, markets anticipated June as a potential meeting for the BoE to start cutting rates. However, stickier inflation and a resilient labor market have complicated the decision. The UK general election in two weeks adds uncertainty, likely prompting the BoE to wait and assess the impact before acting.
While two Monetary Policy Committee (MPC) members voted for a 25bps cut in May, the BoE's tone remained hawkish, emphasising the need to keep policy restrictive to tame inflation. The BoE's updated projections in May showed inflation revised lower, with consumer price index (CPI) expected to hit 2% in the second quarter (Q2) 2024. However, core inflation remains elevated.
What’s the impact of the latest inflation data?
UK inflation data for May was released this morning, showing that annual price growth had returned to the BoE’s 2% target. But this is just one month’s data, and policymakers will want to see further progress on this front before making a move.
BoE meeting – impact on sterling
This week’s inflation reading has given hope that tomorrow’s BoE meeting will give strong hints about an impending rate cut, at least once the election is out of the way.
But if those hints fail to materialise, then the pound may discover new strength. Against the dollar, sterling has steadily recovered over the past week, recouping some of the losses from 13 and 14 June.
Conversely, if more MPC members vote to cut rates, then we may see renewed softness in GBP/USD. Last week saw losses stall around $1.2650, so a close below this level would take the price to a one-month low.
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