The fate of an early summer interest rate cut may be defined this week, by hotly anticipated inflation data that will reveal how close the rate of rising prices is to the Bank of England’s official 2% target.
Mortgage holders, house hunters, City experts and millions of other borrowers and savers are waiting for clues on the timing of the first rate cut of the post-Covid era.
The official benchmark cost of borrowing has been on hold at a 15-year high of 5.25% since August last year. The BOE’s 14-meeting run of consecutive hikes which took it there was designed to tame double-digit inflation which peaked over at 11% in October 2022, fuelled by the the spike in energy prices caused when Vladimir Putin invaded Ukraine.
This week, the consumer price index (CPI) is expected to fall to the brink of the BOE’s official 2% target, with forecasts that it will tumble to 2.1% for April on an annual basis, down from 3.2% in March.
That would add to pressure on the Monetary Policy Committee in Threadneedle Street, chaired by BOE governor Andrew Bailey, to cut rates. His outgoing deputy for monetary policy, Ben Broadbent, said today that a cut could come “some time over the summer” if “things continue to evolve” with the economy as the MPC expects.
Broadbent pointed out that the drivers of the period of high inflation, the pandemic and the war in Ukraine, “have now faded”, at least in terms of their “direct effect on inflation”.
He left the MPC with some wriggle room, though, adding: “What we’re now left with are the more persistent, second-round effects of that earlier surge on domestic inflation. How long these persist is unclear.”
Nonetheless, City experts were pointing to Wednesday’s CPI as a milestone on the road to the first cut since 2020. Potential action at the next MPC meeting in June was left open after its May deliberations, which ended in a seven-to-two vote to hold rates, with the dissenters backing a quarter-point cut to 5%.
This week’s drop in inflation is expected to be eye-catching due to falls in energy prices showing up in the numbers.
Analysis from City bank ING pointed out that “electricity/gas will be subtracting roughly one percentage point or more from headline inflation during the second and third quarters” after the 12% fall in household electricity/gas bills that we saw at the start of April. And we’re likely to see something similar again in July,” according to James Smith, ING’s developed market economist.
Into the set-piece inflation reading, Roman Ziruk, Senior Market Analyst at financial services firm Ebury said: “The consensus is for another large, though base-effect driven, drop in the annual data both on the headline and the core indices, which would open the way for a June move [on interest rates]”.
Capital economics expects a BOE rate cut in June, and said Wednesday’s CPI could prove “momentous if we’re right in thinking that inflation fell from 3.2% in March to below the 2.0% target for the first time in three years.”
