2024-07-10 14:45:27
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The main drivers of UK inflation are showing “uncomfortably strong momentum”, the Bank of England’s chief economist said on Wednesday, highlighting the continued uncertainty regarding the outlook for interest rates.
Hugh Peel said the central bank had made “substantial progress” in curbing inflation, which finally reached its official target of 2% in May. He added that it was only a matter of when, not if, the Bank of England’s Monetary Policy Committee would decide to cut interest rates.
But he noted in his speech that services inflation and wage growth remain close to 6%. Peel said recent indicators suggest “some upside risks to my assessment of the persistence of inflation.”
“It is hard to deny that inflation is persisting in the UK,” Peel said. “The MPC needs to ensure that the monetary policy stance is cumulatively restrained enough to ensure that the ongoing dynamics of recent inflation measures are squeezed out of the system.”
Peel’s comments prompted traders to scale back expectations for rate cuts this year, with traders now pricing in a 55 percent chance of an August cut, down from two-thirds earlier on Wednesday.
Sterling was up 0.4% on the day at $1.2841, boosted by expectations of a slower pace of rate cuts.
Peel’s speech comes as the Bank of England prepares for its next interest rate decision on August 1, when many economists believe the central bank is likely to cut rates from the current 5.25%. Peel’s comments suggest the timing of the first rate cut remains an open question.
However, Peel added that the latest data remained consistent with the view that inflation pressures “are now contained and may be starting to decline to levels more consistent with achieving our inflation target.”
Additional reporting by Mary McDougall in London
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