(Bloomberg) -- Britain’s services sector and jobs market are likely to show lingering signs of strong inflation this week, a warning sign that may prompt the Bank of England to hold off on cutting interest rates in August.
Official data due Wednesday is expected to show services inflation ticked down to 5.6% in June from 5.7% the month before, a survey of economists showed. A day later regular pay growth is predicted to cool below 6% for the first time in 20 months in figures covering the three months to May.
While the headline rate of inflation is set to remain around the BOE’s 2% target for a second month, officials at the central bank are looking at underlying measures to get a better sense of how long price pressures will persist. And it’s those indicators that are underpinning concerns about cutting rates too soon.
“An upside surprise/re-acceleration in services inflation and wage growth could put the August cut in question,” said Sonali Punhani, UK economist at Bank of America.
This week’s figures are the last major data releases before the BOE decides whether to ease off on its fight against inflation and cut rates for the first time since the start of the pandemic. While the European Central Bank has already moved to loosen policy, the UK election and lingering concerns about underlying price pressures have delayed a pivot by the BOE.
The minutes of the BOE’s last meeting in June showed that the decision not to lower rates from a 16-year high of 5.25% was “finely balanced” for some of the nine members of the Monetary Policy Committee.
However, last week the BOE’s more hawkish rate-setters were quick off the blocks to warn of persistent inflation pressures after being silent during the election blackout period. Chief Economist Huw Pill, and rate-setters Jonathan Haskel and Catherine Mann all signaled caution over whether to reduce rates in appearances.
Policy maker Swati Dhingra on Monday called for officials to join her in backing rate cuts. She’s the most dovish member of the committee, voting for reductions since February.
“Now is the time to start normalizing so that we can then finally stop squeezing living standards the way we have been to try and get inflation down,” Dhingra said in an interview with the “Rest is Money” podcast released Monday. “We are weighing on living standards and that cost doesn’t need to be paid.”
Investors place a 45% chance of a rate cut in August, down from odds of 60% at the start of this month. The pound last week hit its highest level against the dollar in a year on expectations that rates in the UK will remain elevated for some time and that economic growth is picking up. The UK currency is near the highest since August 2022 against the euro.
Wednesday’s CPI data “will make or break the August meeting,” said Kirstine Kundby-Nielsen, an analyst at Danske Bank. Stronger UK economic data, hawkish BOE comments and political stability following the election have helped boost the pound to its strongest level since 2022 versus the euro, she said.
A monthly survey showed economists revising up gross domestic product growth forecasts for this year to 0.8% from 0.7%. About 86% of those surveyed expect a rates cut in August.
Some economists expect data on Wednesday to show headline inflation dipping below 2% for the first time since April 2021. A handful expect an increase to 2.1%, leaving the median forecast for another on-target reading.
However, services inflation — which the BOE is watching more closely for signs of cooling domestic pressures — has not slowed by as much as the central bank had hoped at its last forecasts in May.
The arrival of Taylor Swift’s Eras tour in the UK in June could put some upward pressure on the services number, according to some forecasters.
Services inflation is likely to remain well above the 5.1% rate the BOE had expected by June. However, the rate-setters played down the overshoot at the meeting last month, pointing to volatile or index-linked parts of the basket. Pay growth excluding bonuses is expected to fall from 6% to 5.7%.
“We think the data will keep the prospect of an August interest rate cut alive, though recent comments from policymakers suggests it’s far from a done deal,” said Dan Hanson and Ana Andrade, economists at Bloomberg Economics.
“Wage gains have recently been sticky, partly impacted by the near-10% increase the National Living Wage, but should show clearer signs of easing in upcoming releases,” they said.
There were other signs of the jobs market cooling on Monday. A separate report showed active job postings fell 1.6% in June from a month earlier to 1.69 million — still above pre-pandemic levels. New advertisements for jobs fell 2.6%, according to the Recruitment & Employment Confederation.
“Recruiters reported some hesitancy among businesses about hiring,” said Neil Carberry, chief executive officer of REC. “The jobs market is proving remarkably resilient to economic pressures.”
The BOE’s rate-setters also have to judge whether a faster-than-expected economic recovery in the UK will hinder their ability to loosen policy.
Last week figures showed that the economy grew 0.4% in May, double the pace expected by economists. It means that, if GDP is flat in June, the economy would have grown by 1.4% in the first half of the year, above the 1.2% expansion expected by the BOE.
--With assistance from Greg Ritchie.
(Updates with comment from Dhingra.)
©2024 Bloomberg L.P.
