Yahoo Finance Multiple UK interest rate cuts less likely this year after inflation blow
Odds rise on Bank of England making a 'hold' call on 9 May
Inflation slowed down less than expected, pushing City investors to cut their forecasts for how much the Bank of England will cut interest rates this year. Traders are now pricing in just one interest rate cut this year, compared to expectations of five cuts at the start of 2024.
The UK’s annual inflation rate fell in March for a second consecutive month, dropping to 3.2% – the lowest level since September 2021. Core measure, which strips out volatile elements such as energy, food, alcohol and tobacco, dropped from 4.5% in February to 4.2%.
However, both figures are higher than expected, with the market having looked for CPI of 3.1% in March and core inflation of 4.2%.
Read more: UK inflation drops to 3.2% in March as Bank of England hints at rate cuts
Ian Stewart, chief economist at Deloitte, said: “Inflation is in retreat but the Bank of England cannot yet be sure that it is beaten. Headline inflation is likely to drop below 2% in the coming months, but to be confident it will stay there wage pressures need to ease.
“With earnings growing at close to 6%, and the economy reviving, the Bank will be in no hurry to cut interest rates.”
The BoE decided last month to leave UK interest rates on hold at their current 16-year high of 5.25% for a fifth consecutive time.
Both the European Central Bank (ECB) and the US Federal Reserve (Fed) have kept rates unchanged this month.
Services inflation, which is closely watched by policymakers at the Bank of England, fell from 6.1% to 6% in March, which was higher than analysts’ predictions of 5.8%.
Tomasz Wieladek, chief European economist at asset manager T. Rowe Price, even mentioned the possibility of interest rates being hiked to tame inflation.
“Together with the rising momentum in wage inflation, the sticky services inflation numbers raise the risk the UK inflation battle is far from over and perhaps not yet won. The MPC will be worried about this scenario, and I believe this strong reading will make the MPC cautious about cutting early in the summer. Indeed, given these strong domestic inflationary pressures in both wages and services, the MPC will now likely wait until late summer to get the required confidence to cut rates,” he said.
Read more: Bank of England faces interest rates dilemma as job market cools
“However, there is another risk that is not yet spoken about in the UK monetary policy debate. If services inflation and wages continue to remain persistently at these high levels, the risk the Bank of England will have to hike this year is rising. After all, the Bank of England is data-dependent. If the data continue to indicate policy is not tight enough to bring inflation back to target, the MPC may have to tighten policy further,” he added.
The Bank of England is very unlikely to take any action at its next meeting, on 9 May.
The money markets indicate there is a 96.5% chance that the Monetary Policy Committee votes to maintain Bank rate at 5.25% in May, and just a 3.5% possibility of a cut.
The National Institute of Economic and Social Research (NIESR) believes the Bank of England "may need to exercise some caution" in its expected upcoming monetary loosening.
"Indeed, we may not see a rate cut in May due to insufficient evidence of cooling underlying inflationary pressures. Whether a cut will come in June or August will become clearer next month," the think tank said.
Ruth Gregory, deputy chief UK economist for Capital Economics, said: “The smaller-than-expected fall in CPI inflation from 3.4% in February to 3.2% in March (BoE and consensus 3.1%, CE 3.0%) and drop in the core rate from 4.5% to 4.2% (consensus & CE 4.1%) raises the risk that inflation will follow the trend in the US and soon stall.
Read more: Eurozone inflation eases to 2.4% raising hopes for interest rate cuts
“The chances of interest rates being cut for the first time in June are now a bit slimmer.”
Bank of England governor Andrew Bailey on Tuesday said he saw “strong evidence” that higher interest rates were working to tame the rate of price rises.
The central bank’s own forecast is for inflation to “briefly drop” to its 2% target in the spring before increasing slightly.
Bailey signalled that UK interest rates remain on course to fall in the coming months amid growing fears that stubborn inflation will force the US to delay rate cuts.
He said at the International Monetary Fund (IMF) spring meetings in Washington: “Our judgement with interest rates is how much do we need to see now to be confident of the process?”
Watch: Powell says Fed needs more confidence for rate cuts
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