Inflation data suggests that the Bank of England could look to push back its largely anticipated interest rate rise in August, according to market analysts.
On Thursday, the Office for National Statistics (ONS) revealed that the consumer price index (CPI) stayed level with the previous month’s figure at 2.4 per cent.
This is despite widely held expectations that higher energy prices would push the rate up to around 2.6 per cent. Falling prices for clothing and games, toys and hobbies provided something of an offset to this however, resulting in the lower-than-expected result.
CPI over 5yrs
Source: ONS
Output price inflation ticked up to 3.1 per cent and raw material costs jumped 10.2 per cent but overall it means that inflation remains at its lowest level for 12 months while core inflation is at a 15-month low.
The retail price index (RPI) figure, which includes mortgage interest payments, remained elevated at 3.4 per cent.
Meanwhile, figures for wage inflation showed average weekly wages grew by 2.5 per cent on the year over the past three months.
This marked the lowest figure for six months and means that people’s pay packets are currently only growing by slightly more than inflation, AJ Bell personal finance analyst Laura Suter said.
However, Nancy Curtin, chief investment officer at Close Brothers Asset Management, said that the recent CPI figures should at least enable the UK to feel some benefit of wage growth in June.
“While this should be supportive of consumption, the prospect of real-terms wage growth is not enough on its own to change investors’ perceptions of the UK economy,” she said.
“Muted wage growth continues to drag on economic growth as does choppy industrial production, while manufacturing growth is slowing too.”
As well as this, the UK’s productivity also remains exceptionally low, she added, noting that until this is tackled, profitability gains will be hard-won.
“UK businesses may need to start investing in productivity enhancing tech, but to do so, they need greater certainty about the UK’s future trade policy with the European Union,” Curtin said.
Sterling eased back on the inflation figures, with the pound dropping three-quarters of a cent against the dollar.
This is a result of traders revising their bets on an August rate rise, according to Hargreaves Lansdown senior economist Ben Brettell.
“Sterling has been unwanted of late, falling heavily in the past few weeks amidst political turmoil in the UK,” he said.
Overall, markets had been pricing in around an 80 per cent chance that the Bank of England (BofE) would lift borrowing costs in August.
“Today’s inflation data combined with yesterday’s lacklustre wage growth figures could force policymakers into a rethink,” Brettell said.
“There’s certainly a case for higher rates as soon as next month but I think the decision is more finely balanced than the markets would have you believe.
Bank of England CPI inflation projection May 2018
Source: BoE
The senior economist added: “The Bank will be mindful of Brexit-related uncertainty and may decide to wait for confirmation that the weak first-quarter growth figure was just a blip before raising borrowing costs.”
Thomas Wells, manager of the Smith & Williamson Global Inflation-Linked Bond fund, agreed, noting that the below-consensus inflation print is in-line with his expectations that CPI would start to be better behaved in the second half of the year.
“The large Brexit-driven surge in inflation due to the slump in the value of the pound is now finally beginning to wash out of the system, which will make it more difficult for the Bank of England to raise rates, particularly given a backdrop of Brexit and trade uncertainty,” he said.
AJ Bell’s Suter is another who believes the Bank may now hold off on a rate hike. She said: “Both these figures together will make for tougher reading for the Bank of England’s rate setting committee when they meet next month, with some predicting the figures mean that a mooted interest rate rise will be put on the back burner.”
Brown Shipley investment analyst Jonathan Chitty however said that while the recent figures make the decision on interest rates les certain, there are other factors at play that could mean the BofE will indeed raise rates in August – as expected.
“In the near term, the most obvious risks to the UK economy are related to Brexit negotiations,” he said.
“Aside from weather-related issues in the first quarter of the year, the UK economy has been relatively robust, and with interest rates still at emergency levels we would consider an August hike as sensible.”
Simon Longfellow, head of Janus Henderson Investors-backed investing resource stepstoinvesting.com, meanwhile believes that the central bank could be minded to do so as early as next month, as the inflation figure remains above the targeted 2 per cent level.
“For yet another month we continue to see high inflation. This coupled with last month’s interest rate decision means consumers will continue to see their money being eroded,” he said.
“Looking ahead, after a positive month for the UK with the hot weather and a summer of sport boosting the UK economy, we may well see the Bank of England increase rates as early as next month.”