(Bloomberg) -- UK inflation is expected to pick up for the first time in 2024 in new data that’s likely to keep Bank of England policy makers wary about pushing ahead with further interest rate reductions next month.
Forecasters expect official data on Wednesday will show that inflation accelerated to 2.3% in July from 2% in May and June as a favorable tailwind from energy bills fades out of the figures, a survey of economists by Bloomberg showed Friday. Other data this week is likely to show the labor market loosening, reducing upward pressures on pay.
The figures leave BOE officials led by Governor Andrew Bailey a difficult balancing act that the bank has already said means it will move slowly on reducing the cost of borrowing. While inflationary pressures are set to accelerate this year, unemployment is also likely to rise. The bank, which expects inflation at 2.4% in July, is keen to keep the recovery from last year’s recession on track.
The data will be crucial in setting the tone for BOE policy heading into the autumn with markets expecting a delay before the next rate cut. It will also be closely watched by Keir Starmer’s government, which is hoping for lower interest rates and a pickup in growth to help bring in more money to the Treasury, funding improvments to public services.
“The resurgence in headline inflation in the second half of the year will create a challenging backdrop for the BOE,” said Dan Hanson, chief UK economist at Bloomberg Economics. “While the rise can be easily explained by base effects associated with energy prices, the optics of easing policy when inflation is on the rise aren’t favorable.”
Forecasters expect this week’s figures to entrench the view that the BOE will leave rates on hold in September and wait until November before reducing borrowing costs again.
While the pound is still the best-performing Group-of-10 currency this year, it has struggled for momentum recently partly due to the outlook for a slow rates-loosening cycle. Sterling has fallen against the euro for the last four weeks, its longest losing streak since December 2022.
Should inflation and growth data come in softer-than-expected, sterling will likely be vulnerable to another leg lower. That’s because investors are positioned for less easing from the BOE than both the European Central Bank and the Federal Reserve in the coming months on the view that price pressures are stickier in the UK than elsewhere.
Money market pricing implies two further quarter-point cuts from the BOE this year, compared to three more from the ECB. For the Fed, investors are bracing for a larger half-point hike alongside a couple quarter-point reductions.
The BOE’s Monetary Policy Committee only narrowly voted 5-4 for the first cut in over four years on Aug. 1. The rate-setters also signaled they will be cautious over backing another move quickly given pressures from the services sector and jobs market. However, investors still see a small chance of another move as soon as September if turbulence on global markets deepened and the UK saw a string of dovish data surprises.
“We see no urgent case for a follow up rate cut, but the BOE is clearly looking at this data and if it shows they’re right to be chilled about services inflation pressures then it will open up that question,” said Elizabeth Martins, UK economist at HSBC. “The message from the BOE was ‘we’re not rushing into the next one.’”
The predicted uptick in Wednesday’s inflation reading will be driven by a plunge in energy bills last July falling out of the annual calculations, a shift that the BOE said on Aug. 1 that it believes will reveal “more clearly the prevailing persistence of domestic inflationary pressures.”
Officials expect inflation to continue to edge higher over the rest of the year before cooling again, though hot services prices risks causing price pressures to linger.
Inflation will be just one of four data releases this week that could play into the BOE’s thinking in the coming months:
The figures may add to or allay the central bank’s concerns over the strength of the economy’s recovery after flagging growth as an inflationary threat at its August meeting.
“Growth in the first half has been surprisingly stronger than the bank has expected so at least from domestic data, it seems that the bar for a September rate cut is relatively high,” said Anna Titareva, European economist at UBS.
--With assistance from Irina Anghel, Harumi Ichikura and Greg Ritchie.