Headline consumer price inflation declined in June, with a reading of 7.9%, from 8.7% in May. However, core inflation, not taking into consideration volatile energy, food, alcohol and tobacco prices, remained at 6.9% on an annualized basis. Market expectations as of Tuesday morning were that there was a 62% probability of the Monetary Policy Committee voting to raise interest rates by 25 basis points, which would take the Bank rate to 5.25%.
The market is divided concerning what the Bank of England will decide on Wednesday regarding monetary policy. Refinitiv data suggests the likelihood of a 25 basis point increase in interest rates, taking the main Bank rate to 5.25%. However, market participants also anticipate a 50 basis point increase, which would follow the central bank's unexpected move in June. Though British inflation has decreased recently, it is still higher than in other advanced economies and beyond the Bank's 2% target. Tuesday's British Retail Consortium data revealed that shop price inflation cooled from 8.4% in June to 7.6% in July and even declined month-on-month, suggesting the country might have seen the worst of its cost-of-living crisis.
The British economy has exhibited an unexpected resilience in spite of the Bank of England's thirteen successive rate hikes. Although the U.K. GDP was stagnant in the three months to the end of May, the threat of a recession has been averted. Goldman Sachs remarked in the weekend that the MPC will be examining three indications of prolonged inflation to decide how much extra monetary policy alteration is necessitated – the abundance of labor in the market, wage growth and services inflation. Following an excellent April labor market report just prior to the June meeting, the job scene decreased drastically in May. Nevertheless, wage growth has maintained high levels with regular pay in private sectors rising to 7.7%. Although core inflation registered a drop in June, the momentum of services inflation is continuous. BoE officials have been reluctant in giving any assessment on how they will comprehend the incoming facts since the June meeting. In view of the limited clue as to the way the MPC has received the recent two months of economic data, Goldman thinks that this week's conference is a "close call." But the possibility of the quarter-point move appears to be more likely than that of the half-point hike. The Wall Street giant envisages a vote of 8-1 with the one opposing opinion being in favor of preserving the rates unchanged.
Analysts have noted that the overall data is more mixed going into the August meeting than it was in the lead-up to the June meeting, with the U.S. Federal Reserve and the European Central Bank implementing quarter-point hikes that same week and striking cautious tones. Data such as labour market, wage growth, and services inflation had all been greater than expected, yet this week saw the weak flash PMI, non-committal messaging from the Fed and ECB, as well as receding market pricing for the August meeting. Inflation remains above target but is heading in the right direction, and the initial PMI readings for July suggest that the economic slowdown in the second quarter has carried into the third, particularly in the services sector. Consumer confidence has also dropped significantly in July, while unemployment is at 4% and vacancies are continuing to decrease.
Given these conditions, observers remain slightly in favor of a big rate hike on Thursday, with Barclays analysts predicting a half-point rise as wages and core inflation stay elevated. BNP Paribas' European economist also agree that the MPC is willing to 'front-load' tightening, based on Governor Andrew Bailey's comments at the Sintra conference.
Bailey defended the 50 basis point hike in June, citing the evidence that suggested the necessity of the increase. Swannell and Hollingsworth stated that the data since the meeting has supported more than 25 basis points of additional tightening. Goldman Sachs expressed that there had been progress in balancing labor market supply and demand, but not enough for this to be the last rise in interest rates yet. They believe further 25 basis point increments are likely in order, to arrive at a peak rate of 5.75%, or until the MPC sees a slowdown in wages and services inflation.
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