The United Kingdom’s inflation rate has finally aligned with the Bank of England’s (BoE) long-term target of 2% for the first time in nearly three years. As the UK inflation dropped, speculations swirled around potential rate cuts by the Bank of England this year. Moreover, in case of a rate cut, crypto adoption in the UK might soar, potentially driving up the prices.
Latest UK Inflation Data
According to data released on Wednesday, the UK Consumer Price Index (CPI) rose by 2.0% on an annual basis to May 2024, down from 2.3% in April. This marks the slowest rate of inflation since July 2021. Furthermore, the slowing UK inflation has raised hopes that the central bank, BoE, might soon consider cutting interest rates.
The data also showed that on a monthly basis, the CPI increased by 0.3% in May. The result was below the forecasted 0.4% and consistent with the previous month’s growth. Meanwhile, the Office for National Statistics highlighted that the largest downward pressure on the monthly inflation rate came from falling food prices, which had risen in the same period last year.
Conversely, the largest upward pressure came from motor fuels, with prices rising slightly this year compared to a fall last year. Whilst, Core inflation, which strips out volatile items such as food, energy, alcohol, and tobacco, decreased to 3.5% annually from 3.9%, matching market expectations. This broader measure of price stability reflects a similar disinflationary trend seen globally. It follows the cool inflation data from the U.S. last week.
This moderation in inflation is notable, considering the UK experienced a peak inflation rate of 11.1% in October 2022, the highest level since 1981. The BoE had steadily increased interest rates from December 2021. The BoE rates peaked at 5.25%, to combat this inflation surge.
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Exploring The Impact On Crypto
Despite this recent decline in inflation, netizens expected the BoE to maintain current interest rates in its upcoming meeting on Thursday. However, speculation is mounting that a rate cut could be on the horizon. The cut could potentially be seen as early as August if the trend of slowing inflation continues.
The prospect of lower interest rates has been received positively by market analysts and investors. For context, lower interest rates reduce the cost of borrowing, stimulate economic activity, and can lead to higher investment returns. This is a promising development not just for the traditional financial markets but also for the ever-evolving crypto space.
The potential for a BoE rate cut could have significant positive implications for the crypto market. Historically, cryptocurrencies like Bitcoin (BTC) have shown sensitivity to macroeconomic conditions, particularly interest rate changes. Reduced interest rates often lead to a depreciation of fiat currencies.
Hence, investors are drawn toward alternative assets, including cryptocurrencies, in search of higher returns. Moreover, moderate borrowing costs could increase liquidity in the market, allowing more capital to flow into high-risk, high-reward assets like cryptocurrencies.
This increased liquidity often correlates with bullish movements in the crypto market as investors seek to diversify their portfolios and hedge against potential fiat currency devaluation. Earlier, the crypto market witnessed a similar trend when the European Central Bank slashed interest rates by 0.25%. Bitcoin and altcoins rallied after the rate cut news came in, hence, if BoE follows the trend, the market could witness a strong rebound.
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