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The latest data out of the UK is sending mixed signals to stock traders, notably cooling down any high hopes for an interest rate cut next month. The Bank of England (BoE), faces a continuing challenge as British inflation remained steady at 2.0% last month. This defies a widely anticipated slight decline and prompts investors to rethink the likelihood of an imminent rate reduction.
The inflation bump was largely driven by significant hikes in hotel prices, highlighting the persistent price pressures within the services sector. Experts remarked that while the broad inflation crisis seems to be in the past, the lingering high services inflation underscores ongoing economic challenges. Essentially, it looks like inflation's stubborn cousin isn’t leaving anytime soon.
Economists had mostly braced for a headline consumer price inflation dip to 1.9% for the 12 months through June. This would continue the downward trend from its peak at a bewildering 11.1% in October 2022. However, the Office for National Statistics (ONS) reported services inflation holding firm at 5.7%, contrary to expectations of a slight decline to 5.6% according to a recent poll.
In response, the rate futures market has adjusted its expectations. Before the data release, the odds for a BoE rate cut on August 1 were 50-50. Post-release, the belief has dwindled, now showing about a one-in-three shot. The pound sterling had a fleeting rise against the dollar following the data, only to return to just above its prior level.
While May’s fall in consumer price inflation to the BoE’s 2% target brought some comfort for the first time in nearly three years, the institution remains cautious. The persistent strength of services inflation is a primary concern, driven in part by wage growth in a labor market that’s currently as competitive as a London morning commute.
Upcoming data, expected to show wages still growing by nearly 6%, further fuels the conversation. This rate is about double what would be compatible with keeping inflation at the target 2%.
Adding a dash of political intrigue, a rate cut could serve as an early boon for the new leadership. Prime Minister Keir Starmer, alongside Finance Minister Rachel Reeves, has promised to fast-track growth for Britain's languid economy after their sweeping election win. Their legislative agenda, which includes plans to rev up the economy, is due for a parliamentary announcement later today.
However, last week BoE’s Chief Economist Huw Pill warned that the timing of any rate cuts remains uncertain, given the stubbornly high price pressures. Adding to the complex economic landscape, core inflation, stripping out the volatile food and energy prices, stayed at 3.5% for the 12 months leading up to June.
All in all, while signs of economic easing are emerging, underlying inflation pressures continue to hint that any dreams of a rate cut next month might be premature. Traders will need to keep their strategies nimble amid these swirling economic currents.
