U.K. Inflation Unexpectedly Slows to Ease Pressure on the BOE

  • Annual pace of price gains falls for first time since October
  • Bank of England makes next policy decision on August 3

U.K. Inflation Slows to 2.6% in Break for BOE

Bank of England policy makers who were concerned that price growth was getting out of hand suddenly have a bit of breathing space.

The inflation rate slipped to 2.6 percent in June, the Office for National Statistics said on Tuesday. It’s the first drop in the annual rate since October, and economists had forecast that it would hold at the four-year high of 2.9 percent reached in May.

The data undermines arguments for the immediate interest-rate hike that a minority of policy makers supported at the last BOE decision as inflation looked set to veer further above the 2 percent target. There are also signs economic growth is cooling as consumers, the engine of growth for the past year, start to rein in spending.

“The BOE has taken a noticeably hawkish line recently, but today’s data cast doubt over a rate hike later this year,” said James Smith, an economist at ING Bank NV. Even if inflation does recover, “the decision to hike rates still hinges on the growth outlook” which is being hampered by political uncertainty and the squeeze on households.

The pound reversed gains to fall 0.2 percent to $1.3026 as of 11:25 a.m. in London.

Motor fuels and recreation items such as games were the main contributors to the lower inflation rate, the report said. Core inflation -- which excludes volatile food and energy prices -- slipped to 2.4 percent from 2.6 percent in May. Food prices fell 0.2 percent on the month.

The pound’s 12 percent decline since the U.K. voted to leave the European Union has helped fuel a pickup in prices. There are signs that pressure is now easing: import prices for factories slipped 0.2 percent on the month and the annual rate of gains slowed to 9.9 percent from 12.3 percent.

Unsavory Trade-off

That easing could prove temporary, economists say. George Buckley, an economist at Nomura, says inflation will continue to accelerate to around 3 percent by the end of the year. That means the BOE will be stuck with the unsavory trade-off between sluggish growth and above-target inflation for some time.

“Part of this is the seasonality, from month-to-month, in price movements,” Richard Jeffrey, chief economist at Cazenove Capital Management, said on Bloomberg Television. “I still think that core inflation is going to trend higher, that there are all sorts of signs in the economy that we have become slightly more inflationary.”

The BOE announces its next policy decision and publishes new forecasts on Aug. 3. They’ll have more information to consider by then, as retail sales are published on Thursday and the first estimate of second-quarter gross domestic product is due out on July 26.

Officials voted 5-3 to keep rates on hold last month and have been drawing the battle lines in recent weeks over whether to stifle rising inflation. While the economy has held up better than many expected in the wake of the Brexit referendum, growth slowed to 0.2 percent in the first three months of the year, and recent surveys suggest it won’t recover much in the second quarter.

Governor Mark Carney has said he’s looking at whether exports and investment offset the hit to consumer spending in determining whether he’ll support tighter monetary policy. Chief Economist Andy Haldane indicated last month that he may start voting for a rate increase soon, though similarly to Carney, he said the outlook for wages will be crucial in informing his decision.

“They really want to see that wage growth return and we just aren’t seeing that,” ING’s Smith said. Overall earnings rose just 1.8 percent in the three months through May, despite unemployment dropping to its lowest level in 42 years.

The murky picture means economists see the BOE holding its key interest rate at its record-low 0.25 percent level until mid-2019, according to a Bloomberg survey. Investors lowered the odds of a hike this year to about 40 percent from 50 percent after the inflation data, according to short sterling trades.

— With assistance by Mark Evans, and Harumi Ichikura

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