UK April CPI: Bring on the Rate Cuts?
The UK will provide its usual data barrage before the market opens on Wednesday, with the chief focus being on April CPI (inflation data). The general mood in the market has come to expect a disinflationary narrative, after other CPI figures around the globe have been softer than expected. But the recent economic uptick in the UK could threaten that downward trend for inflation.
The markets are now counting down the days to when it’s expected that the BOE will start easing, with a consensus starting to coalesce around the August meeting. That’s when the Bank also issues its next monetary policy report. But there is still a pretty strong contingent saying it could happen in June. Crucially for the market reaction, there is about a 60% chance of a rate cut being priced in for the earlier date as well. The BOE will be on a sort of hiatus through July, which is why there is a large time gap between the next two meetings.
And the Vote Says…
There was a significant shift at the BOE meeting held earlier this month. At least that’s what can be interpreted from the market reaction. There was one MPC member shifting his vote from hold to cut, leaving the vote at 7-2 to hold. That wasn’t entirely a surprise, but it was significant because the vote switch came from the Deputy Governor, Dave Ramsden. Presumably, he represents a measure of the official stance of the central bank
And to seemingly bolster that notion, the Governor, Andrew Bailey, has been notably dovish over the last couple of months, saying that the market was doing well in pricing in rate cuts this year. This is an unusual position for the leader of a central bank, since often officials are trying to nudge the market and therefore their comments differ from what’s being priced in by the futures market.
It Comes Down to the Data
What markets will be looking for, then, is confirmation that the inflation rate continues its downward trend. It should be noted that CPI doesn’t have to get all the way down to target in order for the BOE to ease. The consensus among authorities is that rates are currently restrictive, which means they could be hurting the slow economic recovery in the country.
That means they would be inclined to cut rates as soon as there is convincing evidence that inflation will come down to target in a reasonable timeframe. So, if all measures are pointing downward, it could be seen as a sign that the conditions for a rate cut are close to being met. Though it would likely require a substantial miss from expectations to fully convince the markets that a rate cut will definitely happen at the next meeting. On the other hand, a beat could push the market consensus to match up with the economists’ consensus, which would likely give the pound a boost.
What to Look Out For
The annual inflation rate in the UK is expected to crater to 2.3% from 3.2% prior due to base effects. That means last year’s Ofgem price hike for energy will roll off the 12-month measurement period. For that reason, there might be more focus on the monthly inflation rate, which is expected to halve to 0.3% vs 0.6% in March.
The core rate is expected to continue its descent, coming down to 3.6% from 4.2% prior. As it strips out the energy component, it is not affected by the Ofgem price hike. The market may pay more attention to this figure, as it is understood to be more closely followed by the BOE for monetary policy purposes.
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