UK inflation for June met the Bank of England 2% target, which will invite questions about the possibility of change to its interest rates.
With the pound hovering around a 25-month low of $1.24 this morning, there were concerns of further damage being caused by the impending inflation data.
However, with inflation in line with expectation for a second month running, there will be relief that the Bank of England can maintain a neutral standing as it awaits further developments.
Despite this, there has been recent news that wage growth is at an 11-year high, which, along with the sliding pound, will mean increase fears of increases to inflation in the months ahead.
Bank of England interest rates – cut or hike?
“Today’s data highlights the difficult place the Bank of England’s monetary policy committee (MPC) find themselves in,” says Andy Scott, associate director at financial risk advisor, JCRA.
“With unemployment at its lowest levels in over 40 years and wages growing at the fastest pace since 2008, the prevailing logic would be to raise interest rates to prevent CPI from rising too quickly in the coming months.
“However, the Bank – like the rest of us living in a seemingly perpetual state of uncertainty – have to wait for clarity on Brexit to determine the best course of action.”
The UK’s new prime minister is expected to be announced next week. However, as both Boris Johnson and Jeremy Hunt have stated their intention to leave the EU without a deal on 31 October if necessary, any additional clarity on the Brexit roadmap will be fairly minimal for the time being.
Bank of England to slash interest rates as no-deal Brexit looms
Rupert Thomson, head of research at Kingswood, states: “With inflation – at least for the moment – bang in line with target and the chances of a no-deal Brexit continuing to rise, any change in rates any time soon continues to look much more likely to be a cut than a hike.”
Andy Scott adds that the Bank of England may have to slash its present base rate of 0.75% then grin and bear any ensuing inflationary surge.
“The bank has said it could have to cut rates to zero in a no-deal Brexit scenario to help support the economy.
“In such a scenario, it may have to tolerate inflation surging to more than double its 2% target, given that Sterling would likely fall by as much as 10%.
“Sterling has fallen to its lowest level versus the Dollar since 2017, and is near its lowest level of 2019, as a result of growing fears that Johnson or Hunt will opt for a no-deal exit.
“For these reasons, we expect Mark Carney and the MPC to sit tight and hope that 46 years of EU membership is not ended in an abrupt and disruptive exit in October.”