UK Inflation Moderates, BOE Holds Rates Steady
In a surprising turn of events, the UK's inflation rate slowed less than anticipated last month, suggesting a cautious stance from some Bank of England (BOE) officials regarding interest rate cuts. According to data released by the Office for National Statistics on Wednesday, consumer prices rose by 3.2% in March compared to a year earlier, down from February's 3.4%.
This figure, although marking the lowest inflation rate since September 2021, slightly exceeded both BOE and private-sector economists' expectations, who had forecasted a reading of 3.1%.
BOE Awaits Subsisting Price Pressures Before Rate Adjustments
Despite the decline in headline inflation from its peak of over 11% in late 2022, BOE Governor Andrew Bailey and his colleagues remain vigilant, awaiting evidence of easing underlying price pressures before contemplating a cut from the current interest rate of 5.25%, which stands at a 16-month high. The recent drop in energy prices is expected to further contribute to inflation's descent towards the targeted 2%, although caution prevails within the central bank's ranks.
Market Reaction and Currency Fluctuations
Following the release of the inflation data, the pound Sterling experienced a reversal in its earlier losses, edging up by as much as 0.2% to $1.2445, thus halting a three-day downward trend. However, despite this rebound, the currency has been down by 2.4% against the dollar since the beginning of the year.
Food Prices Offset by Motor Fuel Costs
A closer examination reveals that the rise in food prices was less pronounced compared to the previous year, exerting downward pressure on overall inflation. However, this effect was somewhat counteracted by the increased cost of motor fuel.
Core Inflation and Services Sector
Meanwhile, core inflation, which excludes energy, food, alcohol, and tobacco, experienced a slight dip to 4.2% last month from 4.5%, defying economists' expectations. Similarly, inflation within the services sector, closely monitored by the BOE for indications of domestically driven price pressures, eased to 6% from 6.1%, albeit remaining slightly above projections.
BOE Officials Urge Caution on Rate Adjustments
Notably, some BOE officials, including Megan Greene, have voiced caution against premature rate cuts. Greene emphasized last week that a reduction "should still be a way off," citing wage growth that remains elevated, indicating a supply-constrained economy incompatible with sustaining the 2% inflation target.
Market Speculation and Future Outlook
While money markets foresee a strong possibility of a rate adjustment in August, a full price cut is not expected until September. The certainty of a second reduction by the year's end remains less assured, contrasting with earlier expectations from investors who had anticipated three cuts from the BOE in 2024.
