UK: Inflation to continue testing patience of BoE hawks - ING

In view of James Smith, Economist at ING, UK CPI looks set to stay stubbornly close to 3% today, but with investment and wage growth looking increasingly subdued, their base case is still that the Bank of England won’t hike interest rates this year.

Key Quotes

“We’re looking for headline inflation to dip back to 2.8% today. Whilst that will come as a minor disappointment to markets, it will continue to embolden the hawks at the Bank of England. The main reason for our slightly more cautious outlook today is based on the recent dip in petrol prices, which fell by around 1% in June.”

“But the one to watch today is food prices. These have been less responsive to the pound’s depreciation than in previous episodes. That’s predominantly down to the multi-year supermarket price war, which has driven down prices at the checkout. But that’s started to change in recent months and as the sterling effect spreads more widely throughout the CPI basket, we anticipate that inflation will stay stubbornly close to 3% over coming months.”

“The Bank of England often talks about the growth-inflation trade-off – and whilst the inflation side is clearly tilting towards tighter policy, the decision to hike rates still hinges on growth. The view amongst the hawks on the MPC is that investment should start to pick-up, and wage growth will rapidly accelerate into next year as temporary factors fade.”

“But on investment, the latest survey evidence is not encouraging. A survey by the Confederation of British Industry (CBI) over the weekend found that roughly 40% of firms’ investment plans are being negatively affected by Brexit. That also has implications for wages, where political uncertainty, faltering consumer demand and rising cost bases are limiting the incentives for companies to lift pay packets.”

“It’s therefore looking pretty unlikely that Bank will hike rates this year, although given the recent hawkish chatter, the risk is clearly rising.”