For the Bank of England though, it’s services inflation that matters and for the second month in a row, this has come in higher than expected. Investors would be forgiven for feeling a sense of déjà vu after a very similar pattern emerged this time last year, and at the time markets became concerned that the UK had a considerably worse inflation problem than elsewhere.
Indeed at 5.7%, it’s now 0.4 percentage points above the Bank’s forecast from the May Monetary Policy Report. That all but confirms the BoE will keep rates on hold tomorrow. But it doesn’t necessarily change the game for August’s meeting. The things that kept services inflation elevated aren’t all necessarily telling us much about the underlying trend. Air fares rose more aggressively both in April and May than they did in the same months last year. Package holiday price rises did something similar, and these are areas that the Bank would typically say are driven more by noise than signal.
We’re therefore sticking to our call for the first rate cut to come in August, with a total of three cuts this year. We’ll still get another inflation report next month ahead of the August meeting. Any big surprises here could conceivably cause a further delay. But listening to Governor Andrew Bailey back in May, it sounded like he was keen to get on with the job of cutting interest rates. And a bit like the European Central Bank, the BoE seems more confident in its inflation predictions than it had been over the past couple of years. We’ll be watching tomorrow’s statement for signs that this confidence has been shaken by the latest data, or whether policymakers decide to play it down.
Either way, markets are pricing a 40% chance of an August cut and that seems much too low.
