UK inflation print unlikely to derail aggressive BoE action: PGIM Fixed Income

by | Jul 18, 2023

Katharine Neiss, chief European economist at PGIM Fixed Income:

“The next batch of UK inflation data will be a key indicator for the BoE but may not be enough to derail it from raising rates a further 50bps at its August meeting. Bucking the trend in both the US and the euro area, core inflation in the UK has been accelerating in recent months and is expected to come in at about 7% in the June print. Moreover, the recent agreement on public sector wages will likely translate into stubbornly high inflation.

“Although UK GDP data for the month of May showed a small contraction, it follows on from the April figure, which came in at +0.2%, pointing to flat-ish growth for Q2 overall – and not yet contraction. The May number was actually less bad than feared, considering the additional bank holiday and strike action.

“Our assessment of the recent data flow is that the BOE will remain focused on tightening credit conditions to cool the economy and bring inflation back to target. That said, as we are seeing elsewhere in Europe, manufacturing and construction sector output is weakening, but for now with still-high inflation, it is probably not enough for the BoE to step back from more aggressive hikes. If the slowing continues or accelerates, it could mean 50bps increments are less likely beyond August.”

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