August rate cut ‘on the brink of abyss’ as inflation remains at 2%

Investors have reduced their bets on a Bank of England rate cut in August after new data showed signs of persistent inflationary pressures in some areas of the economy.

Consumer price inflation remained at the BoE’s 2 percent target in June, unchanged from the previous month but marginally higher than the 1.9 percent forecast by economists, the Office for National Statistics said.

And while headline inflation remained on target, a core inflation reading of 3.5 percent and a services inflation rate of 5.4 percent demonstrated the danger of a resurgence of price pressures.

Before the data was released, markets had been pricing in a roughly 50-50 chance that the BoE’s Monetary Policy Committee would vote in favour of a base rate cut in August, lowering it from its current level of 5.25 per cent by 25 basis points to 5 per cent.

But after the data was released, the pound rallied and markets were pricing in cuts of just 9 basis points, according to ING, meaning most investors do not think a cut will happen.

Suren Thiru, economics director at the trade body for certified public accountants ICAEW, said: “While anxiety over underlying price pressures keeps the prospect of an August interest rate cut in suspense, these figures should at the very least prompt a more dovish split of the (MPC) vote to signal that rate cuts are imminent.”

Core and services inflation have consistently proven resilient to BoE base rate hikes and have previously frustrated attempts to bring the headline CPI rate back to target.

The base rate, which has declined from a 32-year high of 7.1 percent in May 2023, is largely driven by services inflation.

The all services CPI index rose 6 percent in the 12 months to June 2024, slightly above the 5.9 percent in May.

While this figure is skewed by rising prices for ‘package holidays and accommodation’, the ONS says services inflation is largely being driven by high wage inflation.

Britons have successfully secured wage increases across most of the economy, helping their purchasing power to outpace the CPI rate but also increasing overall price pressures.

Annual wage growth before bonuses was 6 percent in the three months to the end of April, unchanged from the previous quarter.

The ONS will provide an update on wage growth on Thursday, with the BoE expecting to see a fall in the rate.

Abrdn deputy chief economist Luke Bartholomew, who believes the BoE will still opt for a base rate cut next month, said: “The current tightness of services inflation will leave the Bank wondering how long inflation will remain at the 2 percent target once favourable base effects have passed and domestic price pressures begin to boost headline inflation again.

‘Tomorrow’s wage data will provide further clues about these price pressures, and the Bank expects to see further moderation in wage growth.’

Isabel Albarrán, investment director at Close Brothers Asset Management, is betting that the BoE will wait until its Monetary Policy Committee meeting in September to pull the trigger on interest rate cuts.

“However, economic growth has been more resilient than expected, and this is a concern for some committee members,” he said. “Added to this is the fact that base effects are likely to push inflation higher in the coming months, rather than being a persistent downward force, as has been the case in recent months.

‘However, the Bank has made it clear that there is room for cuts without the need to adopt expansionary policies.

‘The August Monetary Policy Report will provide fresh forecasts and key insight into the Bank’s thinking ahead to September.

‘We are closely following our checklist: a change in guidance, a change in votes and a CPI below 2 percent by the end of the forecast.’