Shoppers choose fresh produce at a market stall in the Kingston area of London, England, Monday, May 20, 2024.
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LONDON — British inflation may be approaching a major milestone, with some predicting a sharp fall in April will push headline interest rates below the Bank of England’s 2% target.
That would represent a significant drop from the current 3.2% level, and economists say it could be a “make-or-break” rate cut in June.
The decline will be driven primarily by the energy market, after the regulator’s cap on household electricity and gas prices was cut by 12% in early April.
If Wednesday’s reading falls below 2%, headline inflation would be at its lowest level since April 2021, and above the 11.1% peak recorded in October 2022, when the UK’s price rises were among the most severe in the developed world. It will get cold from then on.
The country is facing a variety of inflationary pressures, including a persistently tight labor market, a weaker currency that increases the cost of imported goods, and higher gasoline prices compared to other countries.
‘Significant’
Ashley Webb, UK economist at Capital Economics, said it would be “significant” if headline interest rates fell below 2% in April as expected.
“This will be crucial in determining whether the first rate cut from 5.25% occurs in June (as we expect) or in August. More importantly, what happens after that? “We believe inflation will decline further, perhaps to 1.0% in the second half of this year,” Webb said in a note Friday.
A Reuters survey of economists found the overall forecast was slightly higher at 2.1%.
The Bank of England left interest rates unchanged at its May meeting, but like the European Central Bank, plans to cut rates to zero in June as policymakers signaled they were preparing to cut rates in the summer. refused.
BOE Governor Andrew Bailey said the latest figures were “encouraging” but the announcement ahead of the June 20 meeting, including two consumer price index and two sets of wage growth data, would be important.
BOE Deputy Governor Ben Broadbent said in a speech on Monday that if inflation continues as expected, “we could potentially lower interest rates over the summer.”
As of Tuesday, money market pricing continued to put the probability of a June rate cut at about 50%, rising to 73% in August.
Market overreaction?
Economists at ING expect inflation to be “just within” 2% in April, fall below it in May, and remain at that level for much of the rest of the year. This is well below the BoE’s own forecast that interest rates would be close to 3% at the end of the year.
“If we’re right, that should result in several rate cuts this year. We expect at least three rate cuts, which is slightly more than the market is pricing in. But very In the short term, there is still uncertainty around services inflation,” James Smith, developed markets economist at ING, said in a note on Monday.
The latest inflation figures for March show a core figure of 4.2%, excluding energy, food, alcohol and tobacco. Services inflation, an important indicator for the BOE, is 6%.
Services inflation is expected to be 5.5% in April.
Jane Foley, head of currency strategy at Rabobank, told CNBC in an email that the market could be “overreacting” to Wednesday’s weak headlines.
“Both core inflation and services inflation may have a greater correlation to the timing of the first rate cut in the cycle. Assuming services inflation remains elevated, central banks may , potentially delaying the rate cut in August,” Foley said.
