Ahead of the Bank of England’s Monetary Policy Committee (MPC) meeting this Thursday, Benjamin Jones, Director of Macro Research, Invesco, has shared his thoughts saying:
“In our view the Bank of England is marginally more likely than not to cut its policy rate this week. The BoE likely has only a small window in which to kick off its rate cutting cycle before the inflation profile makes cuts much harder to justify.
“Until now base effects for UK inflation have been very favourable and headline CPI is back to target. But those base effects are quickly dropping out of the calculations and will make further progress on inflation harder to achieve. Services inflation has been the stickiest inflation component and maybe a reason for thinking the BoE holds this week. But a closer look at UK services inflation shows that much of the recent strength can be attributed to factors such as hotels (think Taylor Swift concerts), and package holidays, (think wealthier households and retirees with high cash savings and low debts). The BoE should be willing to look through the effect of higher hotel prices and, contrary to basic economic theory, cutting rates might lead to a bit less inflation pressure in those categories that tend to be consumed by older and wealthier households as interest income is reduced.
“New inflationary pressures could start to materialise from factors outside of the UK. The UK imports more than it exports and thus is subject to the vagaries of global price trends. Shipping costs have been rising this year as ships are forced to reroute to avoid conflicts. While these shipping costs are small upward pressure here lessens the effect of lower goods prices against higher services prices. Finally, wage pressures, though still elevated are headed lower, but suggestions that Labour might pass inflation busting pay increases to some public sector workers could mean that overall wage inflation resumes an upward path later in the year.
“The UK inflation picture today is better than many other developed markets giving the Bank of England an excuse to cut on 1st August. If it doesn’t, it may find that inflation data make it hard to justify a rate cut later in 2024.”
