Closing post: Bank of England governor says more evidence of slower wages needed
Bank of England governor Andrew Bailey has said that he wants to see more evidence of slowing wage growth before being confident that inflation will return to target, in evidence to parliament on Wednesday.
Bailey said that the latest wage growth figures showed signs that pay rises were slowing, but not as far as the Bank expected, in testimony to the House of Lords economic affairs committee.
US inflation surprised financial markets with a higher than expected reading on Tuesday. Today it was the turn of the UK, but the surprise came the other way.
UK annual inflation remained at 4%, when economists were convinced that the consumer price index (CPI) would rise slightly because of higher energy bills.
The slight downside surprise prompted a move down for sterling against the US dollar, and has helped the FTSE 100 to a 0.8% gain, outpacing the rest of Europe’s benchmark indices.
However, Bailey told the committee that services inflation was not compatible with the Bank’s 2% target. The price of services rose to 6.5% in January from 6.4% in December.
You can watch Bailey’s testimony live here.
The key question is whether the Bank of England will see the milder inflation reading as support for cutting interest rates sooner rather than later. Financial markets are pricing in a 50/50 split between bank rate remaining at 5.25% by the Bank’s June monetary policy meeting and it falling to 5% – a single cut.
Market bets imply only a one-in-five chance of a rate cut in the previous meeting in May.
Janet Mui, head of market analysis at RBC Brewin Dolphin, said:
It is a relief to see UK inflation coming in below expectations. The main downward driver came from heavy discounting of furniture and household goods, and a further slowdown in food inflation to the lowest level since April 2022 is very welcome news.
If we see more easing in services inflation together with some weakness in economic data by then, the Bank of England would be more open to and comfortable with starting to cut rates in the second half of this year.
Pushpin Singh, senior economist at the Centre for Economics and Business Research, said:
The concern for policymakers will be that services inflation ticked up again in January, driven largely by elevated wage growth rates. Because of this, Cebr expects the Bank of England to remain cautious by not cutting rates before May and only doing so gradually thereafter.
You can continue to follow our live coverage from the around the world:
In UK politics, it is the final day of campaigning in the Kingswood and Wellingborough byelections
In US politics, Democrats decry Republicans’ impeachment of homeland security secretary Alejandro Mayorkas as a ‘sham’
In our coverage of the Russia-Ukraine war, Ukrainian forces destroy a large Russian landing ship off Crimea
In our coverage of the Middle East crisis, the World Health Organization accuses Israel of impeding aid delivery in Gaza
Thanks for reading today, and please join us tomorrow for more. Next up: UK GDP. JJ
Updated
US stock markets have opened on Wednesday with fairly strong gains.
Here are the opening snaps from Wall Street, via Reuters:
S&P 500 UP 28.94 POINTS, OR 0.58 PERCENT, AT 4,982.11
NASDAQ UP 124.33 POINTS, OR 0.79 PERCENT, AT 15,779.93
DOW JONES UP 125.54 POINTS, OR 0.33 PERCENT, AT 38,398.29
