The UK takes centre stage in the central bank rate cutting narrative next week, with inflation data a day before as an important prelude.
Despite interest rate cuts this month from its European and Canadian counterparts, the Bank of England is not expected to join in the recent cutting trend, but there could be some big clues about how close policymakers are to making the move.
Inflation data from the Office for National Statistics on Wednesday will be particularly important after surprisingly stronger numbers a month ago. The headline consumer prices index for May is forecast to drop below the 2.3% year-on-year in April, though forecasts vary from 1.9% to 2.1%.
Core CPI, which excludes fuel and food prices, is also expected to edge down and all-important services CPI too.
Thursday’s announcement from the BoE’s monetary policy committee could reveal if more policymakers are currently thinking of cutting rates.
The last vote of the nine-person committee saw two members vote for a cut to 5.00%, with seven members voting for no change in the base rate, which was a change from March’s 8-1 vote, while February saw six votes for no change, two for an increase, and one for a cut.
However, many economists expect no change from the 7-2 vote.
As “key signs of inflation persistence” have been stronger than the BoE predicted since the last meeting, economists at BNP Paribas said, “we think it is likely that those who voted to keep Bank Rate on hold in May will need to see further evidence that inflationary pressures are easing before voting to cut rates”.
Economic data and the general election "have effectively taken a June cut off the table", said Barclays' economists, who expect "unchanged policy and little to no change in guidance from the MPC this month" but expect data to support a first cut in August.
However, as seen from the ECB, Canadian and Swedish central banks, the trend is “clearly towards easing rather than tightening policy," said analysts at AJ Bell, noting that the global tally of interest rate cuts in 2024 stands at 70.
However, they say the BoE’s job “may have been slightly complicated by both the calling of a general election for 4 July and the last batch of inflation data.
“Governor Andrew Bailey and his colleagues on the Monetary Policy Committee may not wish to act in any way that could be seen as favouring one political party over another in the run up to July’s poll.”
Moreover, while the BoE is expected to follow the ECB’s example and move before the US Federal Reserve, “the degree to which UK rates can diverge from those in America could still limit the MPC’s room for manoeuvre.
“Too big a gap between the UK base rate and the Fed funds rate could suck capital out of sterling and into dollars, weakening the British currency, at the risk of boosting inflation thanks to how the UK buys and imports more than it sells and exports."
Counter to the wider consensus, economist Simon French at Panmure Gordon said he expects UK inflation to continue undershooting the G20 average through to the autumn, as it did in April for the first time since July 2021, which would give the MPC confidence to cut rates at its August meeting.
“Financial markets remain unconvinced on this point - seeing just a 40% chance of a rate cut at the August MPC. We interpret the chances of an August rate cut at double that level,” he said.
Macroeconomic events next week
Monday 17 June
- UK Rightmove house price index
- EU pay data, consumer inflation expectations
- Chinese industrial production, retail sales and fixed asset investment growth
- US NY Empire State manufacturing index, Fed Harker speech
- G7 meeting in Puglia, Italy begins
Tuesday 18 June
- EU inflation figures, German ZEW economic sentiment survey
- US retail sales, industrial production, Redbook survey, business inventories, capacity utilisation rate, Fed Goolsbee speech, API crude oil
Wednesday 19 June
- UK inflation, house price index and private rents,
- US NAHB housebuilding industry survey
Thursday 20 June
- Bank of England decision, ONS economic activity real-time changes, ONS business insights
- US building permits, housing starts, oil inventories, US weekly initial unemployment claims, Fed Barkin speech
- EU consumer confidence flash, interest rate decision from the Swiss National Bank
- China interest rate decision
Friday 21 June
- UK consumer confidence, retail sales, public sector finances
- Flash manufacturing PMIs for UK, US, Europe, Japan, Asia
- US existing homes sales