UK Inflation Fall Increases Rate Cut Talk

Last inflation data before May's Bank of England rate decision shows another fall in CPI, which is now back at September 2021 levels - but still higher than expected

James Gard 17 April, 2024 | 9:53AM Sunniva Kolostyak
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UK inflation data came in lower for March but higher than expected. The Bank of England is not meeting until May 9, where interest rates are expected to be held.

UK consumer price inflation fell last month to its lowest rate since September 2021 and closer to the Bank of England's interest rate target.

According to the Office for National Statistics, the year-on-year rate of consumer price inflation eased to 3.2% in March, from 3.4% in February, helped by a slowdown in food price growth.

But a slowdown to 3.1% was expected.

Core inflation, which excludes more volatile energy, food, alcohol and tobacco prices, dropped to 4.2% in March from 4.5% in February. But this was still higher than forecasts, which had pencilled in core inflation of 4.1%.

The slowdown in March CPI takes the annual rate of consumer price inflation closer to the Bank of England's 2% target. The next BoE interest rate decision is on May 9 but economists are now looking at August as a potential month for the first rate cut in the UK. In contrast, the European Central Bank is looking at June to start reversing rate cuts, but the Federal Reserve has become increasingly cautious in its note due to persistent US inflation.

UK Inflation Falls - Expert Reaction

Zara Nokes, global market analyst at J.P. Morgan Asset Management (JPMAM):

UK inflation came in stickier than expected today, news that the Bank of England was not hoping to hear. Part of this upside surprise came from a rise in the price of motor fuels, driven by OPEC+ supply cuts and elevated geopolitical tensions in the Middle East. More concerning for the Bank, however, is the stickiness we continue to see in wage data and services inflation, pointing to signs of deeper inflation persistence. The 10% increase in the National Living Wage introduced on 1 April may lead to a broader firming in wage growth across the economy and will be a key watch item for the Bank over the next few months. While the Bank should feel able to take its foot off the brake this summer given considerable progress has been made on inflation at the headline level, if these signs of deeper persistence continue, the pace of further rate cuts may be slow and the magnitude limited.

Modupe Adegbembo, economist, Jefferies

We expect to see inflation falling towards the Bank of England’s 2% target in April (our current forecast is 1.9%) as last year's energy price increases drop out of the annual comparison and Ofgem energy prices decline by 12% on the month. With inflation rapidly falling towards the Bank's target, we think this could be an important trigger to shift the sentiment on the UK. At the moment, rate expectations have moved in line with US rate expectations, but as inflation slows rapidly we think they could begin to decouple more meaningfully.

Later Fed cuts should not alter BoE calculus: the narrative in markets has shifted considerably since the MPC last met, with strong US data pushing the market to rapidly cut expectations of rate cuts, this shift has also impacted expectations for the BoE. Today's beat adds to yesterday's strong wage data, but the data from the UK has not been overwhelmingly hawkish in our view and, importantly, labour demand has cooled considerably and growth remains below potential suggesting that inflationary pressures will continue to ease.

August cut remains our base: we expect the MPC to keep rates on hold at 5.25% in May, our base case is that the MPC starts to cut Bank Rate in August, and recent data has reduced the risk that this move could come earlier in June. We think the BoE will cut rates steadily, penciling in 75bp of hikes across this year leaving Bank Rate at 4.50% by end-2024, whilst markets are now pricing 40bp of cuts across 2024.

Tomasz Wieladek, chief European economist at T. Rowe Price

These numbers are not easy to interpret, as a result of the early timing of Easter this year. Nevertheless, even accounting for Easter effects, it suggests underlying domestically generated inflation in the UK is significantly stronger than expected.

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.

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.

Rob Clarry, investment strategist at wealth manager Evelyn Partners

Despite softer domestic conditions, the Bank’s monetary policy committee will be wary about cutting in the face of higher US interest rates. As a smaller but open economy, the UK is exposed broader global economic forces, and this has been on display in recent weeks as US bonds yields have risen amidst sticky inflation, which has placed upward pressure on UK government bond yields.

Cutting interest rates in this environment would likely lead to sterling deprecation, which would, in turn, lead to higher import prices and put upward pressure on UK inflation. As we enter the summer months, the Bank will continue to face a difficult balancing act between growth on one side and inflation on the other.

Hilary Blandy, fixed income, portfolio manager, Jupiter Asset Management

Today’s CPI release increases our conviction that inflation in the UK is on a downward trend. Although services inflation was slightly higher than expected, the overall headline rate of inflation was lower. Whilst February data showed a slight improvement in GDP, we do not think that growth will be strong enough to prevent inflation from continuing to fall and we expect the Bank of England to start cutting rates this year. In stark contrast, growth in the US has been healthy and there are signs that progress on inflation is stalling. We expect that US monetary policy may start to diverge from the UK, where rate cuts seem more likely. 


UK Inflation - February 2024 Data

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James Gard

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