UK CPI data for the month of June showed inflation slowing during the month. The decline in annual inflation marks the first slowdown since October of last year and led sterling to record losses relative to other major currencies. Market participants interpreted the figures as easing pressure on the Bank of England to raise rates as it convenes to set monetary policy in the beginning of August.
Turning to the actual numbers, the annual inflation rate stood at 2.6% in June, below the expected 2.9% which also coincided with the near four-year high from the previous month. Month-on-month, the inflation rate recorded zero growth, falling short of forecasts for a rate of 0.2% and below May’s reading of 0.3%. Core inflation, which excludes volatile energy and food products, fell to 2.4% year-on-year from 2.6% in May.
Delving into the details underpinning the numbers, the fall was in large part attributed to the decline in global oil prices. Despite forex market participants pushing sterling lower on reduced prospects for a rate rise by the BoE, the numbers could provide some relief to British consumers who have been witnessing their purchasing power decline as a result of elevated inflation after last year’s Brexit referendum. Many economists though, expressed their conviction that inflation will reenter a rising path soon. Adding to this, the BoE, which correctly predicted inflation would stand at 2.6% in June, anticipates inflation to peak at 2.8% later in the year. Therefore, the relief on British households, if any, is expected to be short-lived.
Looking at the market’s reaction, the pound experienced losses relative to majors including the dollar and the euro upon immediate release of the data. Pound/dollar last traded at 1.3025, down two-tenths of a percent. Before the release of the numbers the pair was trading at 1.3071, while earlier in the day it hit a fresh ten-month high of 1.3125. Euro/pound was last up more than nine-tenths of a percent and close to the day’s high of 0.8877. It traded at 0.8815 before the news hit the markets, while it opened below the 0.87 handle.
The BoE’s upcoming monetary policy meeting will take place on August 3. During the last meeting in June, three out of eight Monetary Policy Committee members voted for a rate rise. One of them, Kristin Forbes, has since retired from her position as an MPC voting member, but there have been growing voices for a rate hike as of late – including BoE Chief Economist Andrew Haldane, an otherwise known dove, while even Mark Carney, the Bank’s Governor made some hawkish comments. Today’s data are weakening the case for a rate hike next month, especially if one takes into account the fact that the BoE has so far taken a cautious stance ahead of Brexit negotiations. Economists expect that the British central bank will maintain its official cash rate at the record low of 0.25% throughout the rest of the year.
