After the "last mile" of fighting inflation in the United States was particularly bumpy, the United Kingdom across the ocean has fallen into a similar situation.
On May 22, local time, the latest data released by the British Office for National Statistics showed that the CPI rose by 2.3% year-on-year in April, which was a sharp decrease from 3.2% in March. It was the lowest level in three years, but it was still higher than the 2.1% expected by economists. %.
Although it seems to be close to the target, the inflation situation is still not optimistic. Excluding volatile food and energy, core CPI growth fell to 3.9% in April from 4.2%, higher than market expectations of 3.6%. Inflation in the services sector, which the Bank of England monitors closely, was as high as 5.9%, almost unchanged from 6% in March.
With unexpected bad news on anti-inflation progress, the market has reduced its bets on interest rate cuts by the Bank of England. It is expected that the Bank of England will only cut interest rates by 39 basis points in 2024, and it is no longer fully priced in that the Bank of England will cut interest rates twice this year. In contrast, before the release of the inflation data, the market expected the Bank of England to cut interest rates by 54 basis points this year.
Core inflationary pressure remains persistent
Earlier in May, the market was optimistic that the Bank of England would cut interest rates in June.
On May 9, the Bank of England voted 7 to 2 in favor of keeping interest rates unchanged at 5.25%. Two of them voted for an interest rate cut, namely Bank of England Deputy Governor Lumsden and Monetary Policy Member Dhingra. It is believed that an interest rate cut is necessary at present because there is a lag in the impact of monetary policy decisions on the economy, and the decline in inflation may exceed the Bank of England's expectations.
Before the latest inflation data was released, Bank of England Governor Bailey once hinted that a first 25 basis point interest rate cut could be held as soon as possible at the meeting on June 20. On May 20, Ben Broadbent, the Bank of England's deputy governor for monetary policy, said that if the second round of inflationary pressures can fall as expected, the Bank of England will be able to cut interest rates "at some point in the summer."
This didn't quite work out. Although UK inflation has fallen to its lowest level since the summer of 2021, price pressures persist and the Bank of England may be unwilling to quickly reduce borrowing costs, which are the highest in 16 years.
The sharp fall in UK inflation in April was mainly due to the slowdown in energy inflation. Energy prices fell by 27% year-on-year in April, and natural gas prices alone fell by 38%. Grant Fitzner, chief economist at the Office for National Statistics, said the sharp fall in electricity and gas prices was partly due to the energy regulator lowering price caps. Food inflation also fell further, although a small increase in gasoline prices offset some of the decline.
Cao Hongyu, a researcher at the Bank of China Research Institute, told a reporter from the 21st Century Business Herald that due to the fall in electricity and energy prices, British inflation maintained a downward trend in April, and the 2.3% inflation rate has dropped to the lowest level since mid-2021. However, at the same time, the pace of British inflation has slowed down less than expected, especially the service sector inflation that the Bank of England is concerned about has barely declined, reflecting that core inflationary pressures in the United Kingdom remain stubborn.
Expectations of a rate cut by the Bank of England have also been hit. Yael Selfin, chief economist at KPMG UK, said that the overall CPI is close to the Bank of England's target, but it may not be enough to convince the Bank of England to cut interest rates in June, and core inflation pressures are still worrying. T. Rowe Price． Chief economist Tomasz Wieladek also believes that if inflation data maintains this strong trend, the possibility of the Bank of England cutting interest rates this summer will decrease.
Are hopes for a rate cut in June basically dashed?
The chances of the Bank of England cutting interest rates in June have become slimmer following the release of the latest inflation data.
Victoria Clarke, chief UK economist at Santander, said this was obviously not good news given that service sector inflation was slowing at a glacial pace. In terms of service prices, month-on-month increases in hotel and cafe prices showed how strongly rising labor costs have boosted prices in some industries, challenging the Bank of England's more easing expectations.
Where will the Bank of England's monetary policy go next? Cao Hongyu analyzed that inflation and employment data in May and June will become key references for the Bank of England's decision-making. Judging from market performance, the slower-than-expected slowdown in inflation has lowered expectations for the Bank of England to cut interest rates, and may even force the Bank of England to postpone the first interest rate cut. There are still doubts whether the interest rate cut can be started as scheduled in June.
The performance of the job market needs to be watched closely. While the first jobs data released last week showed the labor market is loosening, wage growth remains stubbornly high at 6%, a level the Bank of England considers too high to sustainably lower inflation. The second round of labor market data will be released a week before the Bank of England's interest rate decision and will be crucial to the decision of rate setters.
At present, there are signs that the UK is returning to the "old path" of fighting inflation in the United States. The stagnation of the anti-inflation process has made the Fed's wait-and-see mood dominate, and Fed officials have emphasized the need to proceed with caution. Atlanta Fed President Bostic pointed out on the 21st that the Federal Reserve needs to be cautious when approving the first interest rate cut to ensure that it does not stimulate business and household spending and put policymakers in a position where inflation is accelerating again. He still expects inflation to fall slightly during the year and that a rate cut would be appropriate by the fourth quarter.
Federal Reserve Vice Chairman Barr also said that the first-quarter inflation data did not increase his confidence that price pressures are easing, which means that it needs to last longer and needs to see more evidence that inflation continues to make progress before it can consider adjusting interest rates. .
On the same day, Fed Governor Waller also emphasized that it would take several more months of good inflation data before starting to cut interest rates. In the three months since the beginning of the year, higher-than-expected price pressures have raised concerns that inflation progress has stalled, but the latest inflation data is "reassuring" that the process of falling inflation may have resumed and that there is no need for the Fed to raise interest rates.
At present, the hope of the Federal Reserve and the Bank of England to cut interest rates in June has been basically dashed, and the European Central Bank may be the first to turn. European Central Bank President Christine Lagarde hinted that interest rates may be cut next month as the trend of rapid consumer price growth has been basically contained. "If the data we receive increases our confidence, there is a strong likelihood that action will be taken on June 6."
On the other hand, although British inflation is cooling slower than expected, it is still on a downward trajectory overall, and the Bank of England is still expected to cut interest rates earlier than the Federal Reserve. Earlier in May, the Bank of England lowered its inflation forecasts for two and three years to 1.9% and 1.6% from 2.3% and 1.9% in February, below the 2% target.
The British economy is also weaker than that of the United States, and the need for interest rate cuts is higher. The IMF currently predicts that the British economy will grow by 0.7% this year, higher than the previous forecast of 0.5%, and that economic growth will rise to 1.5% in 2025. This forecast assumes that the Bank of England will cut interest rates by 50 basis points to 4.75% this year and another 100 basis points in 2025. Officially, the Bank of England slightly raised its forecast for UK economic growth in May. UK GDP is expected to grow by 0.5% in 2024, higher than the 0.25% forecast in February; it is expected to grow by 1% in 2025, compared with the February forecast of 0.75%; Growth is expected to be 1.25% in 2026, compared with 1% forecast in February.
Overall, judging from the current situation, the European Central Bank may cut interest rates first in June, the Bank of England may wait until August, and the Federal Reserve may not cut interest rates until September.
Looking into the future, Cao Hongyu analyzed to reporters that the current core inflation pressure in the United States, Europe and the United Kingdom is still high, and there are differences in inflationary slowdown trends. The downward trend in inflation in Europe and the United Kingdom is more stable than that in the United States. On the other hand, the problem of stagnant economic growth in Europe and the United Kingdom is more prominent than in the United States, and the need for interest rate cuts is relatively more urgent. It is expected that the European Central Bank and the Bank of England will initiate interest rate cuts earlier to alleviate their weak economic growth. The Fed's monetary policy adjustments are still more limited by domestic inflationary pressures.