UK June CPI Inflation Rate Maintains 2%... When Will Interest Rates Be Cut?

The United Kingdom's Consumer Price Index (CPI) inflation rate remained at the price stability target of 2% for the second consecutive month. However, service inflation still showing a high 5% range is seen as an obstacle to the Bank of England's (BOE) decision to cut interest rates.

[Image source=AFP Yonhap News]

According to the UK Office for National Statistics on the 17th (local time), the UK's June CPI inflation rate was 2.0% year-on-year. This matched expectations and was the same as the previous month's inflation rate, which hit the lowest level since July 2021. The month-on-month CPI inflation rate was 0.1%, also in line with expectations.

Meanwhile, the core CPI, which excludes volatile food, beverages, and energy, rose 3.5% year-on-year. This was the same as the previous month but slightly above the market expectation of 3.4%. This suggested that inflation concerns still remain. In particular, service inflation stood at 5.7%. Contrary to market expectations of a slight easing, it remained at the same level as the previous month.

The market had been paying close attention to this indicator in advance, as it is a key metric to check before the BOE's interest rate decision following the early general election. BOE Governor Andrew Bailey and other officials had expressed concerns that cutting rates before the July 4 election could undermine the central bank's political neutrality. In contrast, the European Central Bank (ECB) has already cut all major policy rates, including the benchmark rate.

In the interest rate futures market, the possibility of the BOE cutting the current 5.25% benchmark rate at the August 1 meeting is priced at less than 50%. ForexLive reported, "After the CPI release, bets on an August cut have further diminished," adding, "It may be prudent to wait longer for a safer approach." Bloomberg News analyzed that due to stubborn service inflation, the BOE might hold off on an August rate cut, fearing that lowering rates too early could trigger a rebound in inflation.

Opinions within the BOE are divided. Swati Dhingra, a prominent dove (monetary policy easing advocate), argued in a podcast interview on the 15th that "it is time to start (monetary policy) normalization." The New York Times (NYT) reported that five votes are needed for a rate cut, and if some members join Dhingra's side, a potential rate cut could begin within weeks. On the other hand, Jonathan Haskel said, "It is better to maintain the current rate until there is greater confidence that inflationary pressures have subsided to a sustainable level." Catherine Mann also pointed out that the May CPI inflation rate of 2% might be temporary and that the trend in service inflation should be monitored.

This content was produced with the assistance of AI translation services.