Bank of England set to hold rates despite inflation hitting target
What are the current levels of services inflation and wage growth, and how do they compare to the levels desired by monetary policymakers?
Services inflation in the U.K. is at 5.7%, higher than the 5.5% forecast by economists in a Reuters poll. Core inflation, excluding volatile components, remains elevated at 3.5%. Meanwhile, average U.K. wage growth excluding bonuses stands at 6%, which is uncomfortably high for the Bank of England. Policymakers are closely monitoring these figures, as they are key to understanding domestic price pressures in the country's services-oriented economy. The Bank of England targets services inflation of around 3%.
What was the U.K. headline inflation rate that matched the Bank of England's target, and when was this target last achieved?
The U.K. headline inflation rate matched the Bank of England's 2% target for the first time in nearly three years. This significant milestone was last achieved in July 2021 before prices started to rise due to supply chain issues during the coronavirus pandemic and Russia's invasion of Ukraine, which increased energy costs.
Despite the inflation rate meeting its target, why are markets convinced that the Bank of England will not cut interest rates in their upcoming meeting?
Markets believe that the Bank of England will not cut interest rates in their upcoming meeting because, despite headline inflation reaching the 2% target, services inflation and wage growth remain significantly above the desired levels. The central bank is closely monitoring these factors, as well as the potential impact of energy price fluctuations, before making any decisions on interest rate cuts. Additionally, the Bank of England is likely to maintain a cautious approach given the current economic climate and ongoing uncertainties.