UK heads for pause on rates with inflation slowdown forecast
UK Prime Minister Rishi Sunak is expected to receive a boost this week as inflation slips back into single digits, raising hopes that the quickest series of interest-rate increases in three decades is coming to an end.
More than half of economists in a Bloomberg News survey now think the Bank of England will refrain from raising its key rate again. Figures this week are expected to show inflation dipping below 10% for the first time since August and a cooling in the red-hot labour market.
BOE governor Andrew Bailey and his colleagues are watching the data carefully for signs of a turning point in wage and price pressures as they consider their next decision due on May 11. After raising rates sharply from near zero at the end of 2021, Bailey has recently signalled that a pivot away from tightening is in store.
“It’s pretty clear that labour market tightness is fading,” said Robert Wood, chief UK economist at Bank of America. “Certainly that’s good news for the Bank of England, and it does make the May decision a really close call.”
What Bloomberg Economics Says …
“Economic data released between now and the Bank of England’s May meeting hold the key to whether the central bank will lift rates again. We think the BOE will have reason to pause but markets disagree, having priced more than an 80% chance of another hike.”
— Ana Andrade, Bloomberg Economics.
An easing of the cost-of-living squeeze would give a fillip to Sunak, whose Conservative government is struggling to end the worst industrial strife since the late 1980s ahead of key local elections next month.
Workers demanding their pay keeps up with inflation have disrupted public services and depressed economic output, leaving the Tories trailing behind the Labour opposition in opinion polls. Sunak has pledged to cut the rate of inflation in half by year-end.
Nurses last week rejected the latest government pay offer, and on Sunday the leader of a union representing the profession warned that strikes could continue until Christmas and refused to rule out joint action with junior doctors that could cripple the National Health Service.
A planned 48-hour walkout from April 30 will for the first time hit emergency and cancer care after the Royal College of Nursing said it would provide no exemptions during the stoppage.
The stakes for the government could barely be higher. On Sunday, Conservative chairman Greg Hands admitted that the party stood to lose more than 1,000 seats in municipal polls on 4 May. The results will be a key indicator ahead of a general election due by 2025 but likely to be held next year.
The median forecast is for inflation, which accelerated unexpectedly to 10.4% in February, to drop back to 9.8% when figures for March are published on Wednesday. It would mark the first time since August that inflation has been in single digits.
A much sharper drop is likely in April, when the figures no longer compare with the period of lower energy prices before Russia’s invasion of Ukraine.
“It’s a mix of petrol prices and core goods price inflation coming down that should make for better readings,” said Sandra Horsfield, economist at Investec. “We’ll get the numbers coming down sharply in April and then again later in October when we get the next step down from base effects on energy prices. That will be a big downward swing.”
Meanwhile, concerns about the labour market are likely to ease on Tuesday, with economists anticipating average earnings growth to slow. Wage growth excluding bonuses is set to slip to 6.2% in the three months to February, a second consecutive decline.
Improvements in the data would dial down pressure on the BOE to keep raising rates after 11 consecutive increases since the end of 2021. A Bloomberg survey shows that economists expect the BOE to hold at 4.25%, the highest since the financial crisis in 2008. However, markets are currently leaning toward another half-point increase by September.
This week’s data will be “make or break” for a May rate rise, said James Smith, economist at ING.
“The data is clearly moving in the right direction, and we think barring some unwelcome – and unpredicted – surprises in next week’s data, the Bank will be comfortable in keeping rates at 4.25%,” he said.
The outlook for the economy looked slightly brighter after last week’s gross domestic product figures. The EY Item Club forecaster expects the UK to avoid a recession in 2023 after slightly stronger-than-expected data at the start of the year.
EY Item Club’s spring outlook shows a 0.2% rise in GDP this year, up from the drop of 0.7% predicted three months ago.
However, YouGov’s consumer confidence gauge slipped for the first time in 2023 amid growing concerns over the turmoil in the banking sector. Its confidence indicator fell from 100.3 to 99.4 in March, the first decline since the aftermath of former Prime Minister Liz Truss’s market-rattling mini-Budget.
Retail sales have been trending down over the past year and are expected to show another decline in March, according to Bloomberg’s survey. Sales rose in both January and February, but consumers are paying more to buy fewer goods because of inflation.