UK inflation returning to their 2.0% target rate will give the Bank of England's policymakers something to think about but no interest rate cut is expected at tomorrow's meeting.
The fall in CPI inflation from 2.3% in April "probably won’t be enough" to persuade the Bank of England's monetary policy committee to cut interest rates on Thursday, said Ruth Gregory at Capital Economics.
Several members of the MPC are likely to worry that underlying inflation is still much higher than 2%, with the core rate of CPI, which excludes food and energy, was 3.5% in May and services inflation at 5.7%.
These are still above levels in the euro-zone, Gregory noted, which was another reason to doubt the MPC will be ready to follow in the ECB’s footsteps and cut interest rates tomorrow.
"For now, we are sticking with our forecast that the Bank will first cut interest rates from 5.25% in August, although that relies on better news on services CPI inflation and wage growth in the coming months," she says.
Markets are currently pricing a 43% chance of an August rate cut from the BoE.
Paula Bejarano Carbo, economist at NIESR, says that while it is positive news that annual CPI falling to the Bank of England’s 2% cent target for the first time since July 2021", the bad news is that "we expect to see inflation rebound somewhat from June onwards".
Last week’s elevated wage growth data was an indication that services inflation may remain elevated in the near-term, Bejarano Carbo said.
"Given that today’s data indicate that core inflation remains elevated, this rebound might be sharper than projected.
"As a result, we expect the MPC to exert caution at its upcoming meeting and hold interest rates, despite today’s encouraging fall in the headline rate," she added.
Julian Jessop, economics Fellow at the Institute of Economic Affairs think tank said the inflation "does not guarantee that the MPC will cut interest rates, but it would certainly make it a lot easier".
Kathleen Brooks, research director at XTB, said what the data may do is "solidify a rate cut in August" though she agreed that the outlook for rate cuts beyond that point remains murky, with inflation predicted to rise later in the year.
What policymakers may do, said Brooks, is try to prepare the market for a one-off cut to rates in August, especially because the criteria for headline inflation to fall to 2% has been met.