If we’re right, then that should be a recipe for several rate cuts this year. We expect at least three, which is slightly more than markets are pricing.
But in the very short term, there’s still some uncertainty over services inflation. That’s ultimately what the BoE is most interested in, and it seems to have assumed even greater prominence in the monetary policy decision-making process given recent volatility in the wage figures.
Again the story here is improving, but crucially we think the risk to this week’s services CPI figure is to the upside. April is a time where several price categories see annual price resets, often linked explicitly to prior rates of headline inflation. Just think of phone or internet bills, for example. Social rents are another key area to watch.
On paper, this process should therefore be fairly predictable. We know that the recent headline inflation rates underpinning these price rises are considerably lower than they were last April.
But last year showed how unpredictable this process can be. Services inflation came in significantly higher than everyone – the BoE included – had expected, triggering the biggest single daily move in UK swap rates for the whole of 2023. The figure in 2022 was also pretty high.
