Following the announcement from the ONS that UK inflation has fallen to 2.3% in the year to the end of April, its lowest level for almost three years – but still shy of the Bank of England’s 2% target – industry experts have shared their thoughts with Wealth DFM.
So what do these data mean for the economy and investment markets? Industry experts have been zooming in on what the news might mean for the chances of the UK seeing interest rates starting to fall this summer. Will it be June or maybe August? The data have certainly given the Bank of England’s MPC plenty to chew over ahead of their next meeting in June although a cut then now looks unlikely.
Tom Stevenson, investment director for personal investing at Fidelity International, said: ‘Inflation is nearly back on track. A remarkable round trip to 11.1% and back again is now almost complete, with prices rising at 2.3% in April, close to the Bank of England’s 2% target.
‘As expected, the main reason for the rapid drop in inflation from the previous month’s 3.2% was falling energy costs on the back of Ofgem’s 12% reduction in the household bills cap. The 27.1% fall in gas, electricity and other fuel prices was the largest on record.
‘That’s good news because it means the only reason for interest rates to remain at today’s restrictive level of 5.25% would be if the Bank fears that persistent wage inflation will push inflation back up again later in the year. That is not economists’ central case. The Office for Budget Responsibility expects inflation to remain at or below target for the next three years.
‘Mortgages are already pricing in lower interest rates. Money markets point to a 40% chance of the first quarter point cut in rates coming in June. A further reduction to 4.75% by the end of the year is forecast.
‘For savers who have enjoyed ‘real’ inflation-adjusted returns on their cash for several months the good times may be time limited. The income on Fidelity’s Cash Fund is currently 5.21% but if rates fall so too will the return on money market funds.
‘Stock markets typically offer the best protection from low levels of inflation. At today’s rate, they have outpaced price growth in nine years out of ten since the 1970s.’
Daniel Casali, Chief Investment Strategist at Evelyn Partners, believes that the broader trend of lower inflation should encourage the BoE to cut interest rates this year. Expectations of future monetary easing should give some added support to the economic outlook and stocks,according to Casali as he comments:
“While the inflation data surprised on the upside, the broad downward trend in inflation is intact. This raises the possibility that the Bank of England (BoE) could still cut its base interest rate at its next interest-rate setting meeting in June. Though this is now a tight call.
“In the data, the large leg down in inflation came from a 12% fall in the dual-fuel Ofgem price cap on household energy bills. Given that the energy price cap happens every three months, the next change would not be until July. However, Ofgem would probably make an official announcement in a couple of weeks to warn of an upcoming change. Based on current market prices, Barclays reckons that the energy cap could be reduced by a further 6-7% points. If realised, this would imply further downward pressure on the household energy part of CPI inflation.
“Aside from energy prices, the slowing trend in core CPI inflation is intact. Lead indicators, such as producer price inflation is also heading south. Moreover, cost-push led inflation from wages that feed into the service sector is also decelerating. Recently announced labour market data showed that annual private sector wage growth slowed to 5.9% in March, down from a peak of 8.2% in June 2023.
“So, although the headline CPI inflation of 2.3% is higher than the BoE’s April forecast of 2.1%, an interest rate cut at its 20 June meeting is a distinct possibility given the data does not show the economy is overheating. However, before that meeting there will be one more CPI print to win round a majority of Monetary Policy Committee (MPC) members to favour an interest rate cut. The MPC will also consider that wage growth (albeit slowing) remains elevated. Nevertheless, it will be encouraging for the MPC that falling job vacancies points to lower wage rates in the months ahead.”
Matthew Rees, Head of Global Bond Strategies at Legal & General Investment Management (LGIM), said:
“Today’s UK inflation numbers are yet more evidence that services sector inflation is still running too hot for comfort. On the back of these numbers, we’ve seen investors rapidly re-assessing bets on June rate cuts, pushing up UK interest rates and driving sterling higher.
“The sticky inflation numbers keep us comfortable with our low duration (interest rate risk) position. While inflation remains high, the insurance value of duration is likely to remain low. We also continue to hold most of our duration outside of the UK, preferring Australian and US duration exposures. Forecasting inflation is one of the hardest things portfolio managers do (and some central banks’ forecasts are negatively correlated with outcomes, as stipulated in our recent blog).”
Abhi Chatterjee, Chief Investment Strategist, Dynamic Planner said: “ Prices, as measured by the CPI Index, rose slower in April at 2.3% for the last 12 months, compared to 3.2% in March. While that gives cause for much self-congratulation, it came in higher than the Bank’s forecast of 2.1%. Falling energy costs was the main contributor in slower price rise. This should provide a clear indication that inflation is proving stickier than expected given widespread pricing pressures within the economy, being reflected through stronger wage growth and services inflation. This should temper the expectations of a summer rate cut.
“Being evidence driven, a dilemma for the MPC now becomes whether it waits for data confirming that “the risks from inflation persistence are receding” or taking the fall in inflation as a signal for moving into an easing cycle. In the first instance, the Bank will be late in cutting rates, and in the second, it will be ahead but runs the risk of fuelling more inflation, needing it to roll back the cuts. Either way, one does not envy the position of policy makers at the Bank, as choices must be made. But, as John F Kennedy once said, “The easiest decisions are often the wrong ones.”
Michael Metcalfe, Head of Macro Strategy at State Street Global Markets, reacts to today’s CPI data saying:
“The annual inflation rate fell a lot in April, but not quite as far as anticipated and with service sector inflation still running close to 6%, softer inflation data will still be needed for the BoE to be comfortable cutting rates. Unfortunately, online inflation data for the first half of May shows a continuation of above average monthly readings for the UK, a sticky problem for the BoE.”
According to Isabel Albarran, Investment Officer at Close Brothers Asset Management, an August rate cut is now in sight as she comments:
“Today’s UK CPI figures confirm what many expected – that last month’s 12% decline in the Ofgem price cap has initiated a sharp decline in inflation, coupled with last year’s large increase falling out of the calculation. While the 2.3% reported is slightly higher than the 2.1% expected by many, it is still the closest we have been to the Bank of England’s 2% target since July 2021. This marks a key stage in the UK’s rate cut debate – the question is no longer if interest rates will be cut this year, but when we will see those cuts.
“With the majority of MPC members voting to keep rates unchanged in the interest rate decision, this much softer CPI print will likely go some way in providing the evidence they need to justify an impending cut. However, greater stickiness in services inflation makes us expect that the Bank will wait until August, especially after last week’s Q1 UK GDP data and manufacturing PMI.”
Damian Cocking, Head of Sales at Flagstone International, comments: “Today’s data suggests that we have scaled, but not fully descended, the inflationary mountain in the UK as the Bank of England’s 2% target remains elusive.
“There are now two important quandaries facing the Bank of England and the Monetary Policy Committee. Firstly, how far away are we from inflation being tamed and when can they start to cut base rate and ease pressure on UK mortgage holders and the wider economy. Today’s data suggests a June cut to base rate now looks far less likely and that any planned cuts will be pushed back again.
“Despite that, the direction of travel for UK base rate is most likely to be down over the long-term and for those managing cash deposits in UK and internationally it would be wise to consider which jurisdictions are likely to deliver the best returns on cash over the medium to long-term.”
Danni Hewson, head of financial analysis at AJ Bell, comments:
“Just like that expectation of a June rate cut has been washed away like confetti after rain-soaked summer wedding. Within minutes of the official inflation numbers hitting our screens market expectation that the MPC could shift the base rate down next month plummeted from 50/50 to just over 10%.
“Prices are rising at their slowest level in almost three years. Food inflation has fallen from a whopping 19% twelve months ago to just 2.9%, which has taken away some of the jeopardy for shoppers when they bring their baskets up to the till.
“Households which have had the benefit of a real term wage increase in the past few months will be feeling a little better about their finances, but things are still expensive, and some services in particular are still delivering unpleasant surprises.
“Strip out those volatile bits from the equation – food and energy costs which caused such misery over the past couple of years – and core inflation is still stubbornly high.
“That’s what rate setters will have to consider before they make their decision, especially with inflation touted to deliver a quick encore later in the summer.”
Derrick Dunne, CEO of YOU Asset Management, comments: “There’s not much in the way of surprises in today’s inflation figures, but a few areas will leave the Bank of England pondering its next move. With inflation back effectively to target, the monetary policy committee (MPC) will be considering when, not if, rate cuts should follow. However, those wishing for swingeing rate cuts to ease pressure on households might not immediately get what they want.
“With the economy growing again and the fabled ‘soft landing’ apparently achieved, the incentive to cut rates is less strong. Chances are we’ll see that cut in the Summer, although persistent services inflation, alongside robust wage growth, will dampen the enthusiasm for it. It is possible we’ll see the MPC hold fire until there’s strong evidence that wage growth is cooling, which could be late in the Summer.
“UK markets have enjoyed strong performance too, despite the higher rate environment, with the FTSE100 hitting several highs in recent weeks. That being said, market rates for savings and mortgages are going to crumble on the anticipation of rate cuts. This is good news for households without the Bank even having to lift a finger.
“In a turbulent and quickly changing market, the message for investors is clear. Maintaining a well-diversified portfolio is crucial to being able to manage a wide range of potential outcomes. Anyone unclear on how they should be positioning should speak to an adviser.”
Luke Bartholomew, senior economist, abrdn, said: “While inflation continues to fall sharply, this report will come as a disappointment to the Bank of England and investors looking for a rate cut in June. In particular the strength of core inflation and services inflation, both of which came in a fair bit stronger than expected, will make it harder for the Bank to feel confident that underlying inflation pressure is cooling adequately. There is another inflation and labour market report between now and the Bank’s June meeting which taken together could change the debate again, and certainly the market is likely to remain volatile in it assessment of the likely path of policy. But for now, the case for August over June for the timing of the first cut is looking stronger today.”
Zara Nokes, Global Market Analyst at J.P. Morgan Asset Management (JPMAM) comments: “UK households will be pleased with today’s news; after a turbulent couple of years, inflation in the UK is now in touching distance of the 2% target and is lower than in both the eurozone and US. A sizeable fall in headline inflation was widely anticipated given the 12% drop in Ofgem’s energy price cap in April, and the broader deceleration seen across other components in recent months, notably food and core goods.
“While today’s meaningful decline is welcome news, the Bank of England will be disappointed by the 0.2% pt upside surprise in the headline figure. Although this was mainly a result of an upswing in motor fuel prices, concerns will remain around the stickiness in some underlying components. Critically for the policymakers at Threadneedle Street, services inflation – a useful gauge of inflation persistence – came in a lot hotter than its latest projections.
“Given the recent divergence in opinions across the Committee, the upside surprise in services inflation may dent the Bank’s confidence that entrenched inflationary pressures are receding. While the Bank will still be able to take its foot off the brake this summer, a June cut now looks less likely. In our view a cut in June would be premature; if the economy were slowing we would expect core inflation to follow headline lower, but recent data has shown activity reaccelerating.”
Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services said: “Today’s data announcement by the ONS shows that the UK’s consumer price inflation came close to reaching the Bank of England target of 2% in April. Inflation peaked at 11.1% just 18 months ago and has been away from target for three long years.
“This plunge in headline inflation comes as a consequence of the lower energy price cap announced in early April, as well as falling energy and food prices. This is not to say that prices did not rise at all in April, with consumers feeling increases in services such as TV licenses, mobile phone contracts and water supply. However, April saw the rate of increase in core prices drop relative to this time last year.
“Reaching the Bank’s target inflation rate is a long-awaited milestone for hard-pressed households across Britain. More encouragingly, this is unlikely to be the bottom of the cycle. In under a month’s time, the Bank will vote on the base rate, with favourable prospects for lower rates and reduced inflationary pressures beyond June.”
