Stefano Rebaudo
(Reuters) – Sterling rose after UK data showed underlying price pressures remained strong, meaning the Bank of England is likely to wait longer before cutting interest rates.
UK inflation returned to the 2% target in May for the first time in almost three years, while prices of closely watched services rose 5.7%.
Markets had priced a 30% chance of the Bank of England’s first cut by August from around 50% before the data, while expecting 44 bps. easing monetary policy in 2024 from almost 50 bps. before the data is released.
The euro fell 0.20% to 84.32 pence against the pound, which rose 0.16% to $1.2730. Right before the release of inflation data, it remained unchanged.
“For now, we stand by our forecast that the bank will initially cut interest rates from 5.25% in August, although this is contingent on good news on service sector CPI inflation and wage growth in the coming months,” Ruth Gregory said , Deputy Chief Economist. in Capital Economics.
Last week’s data showed UK wages were rising faster than forecast.
“The big question is whether the bank will stick to previous guidance and whether the market is preparing for the August start of the rate cut cycle,” said Jamie Dutta, market analyst at Vantage, after forecasting no rate decision from the Bank of England on Thursday. .
“Maintaining restrictive policies for an ‘extended period’ is the key phrase to watch.”
“Of course, before we get to that point, there will be a general election on July 4, which may preclude any significant changes in further guidance at that meeting,” he added. Analysts expected the Bank of England to begin easing its monetary policy in August, according to all but two of 65 economists polled by Reuters last week. Most forecast at least one more contraction this year, despite persistently high wage and service inflation.