UK CPI: Navigating the Bank of England’s Balancing Act
The upcoming UK CPI release will be pivotal as markets assess the Bank of England’s delicate balancing act between managing inflation and supporting economic growth. Expectations are for headline inflation to tick back up to 2.2% year-on-year, driven by Ofgem’s 9.5% utility price cap increase and the base effects from last year’s energy price cut dropping out of calculations. However, this would still place inflation 40bps below the BoE’s November forecast, primarily due to falling petrol prices.
Core inflation is expected to stay at 3.2%, while services inflation, a key metric for the BoE, is projected to rise slightly to 5.0%, in line with the BoE’s latest Monetary Policy Report forecast. These readings will be closely analyzed to gauge whether the BoE’s current trajectory of cautious rate cuts remains appropriate or if inflationary pressures could defer December’s decision.
BoE’s Moderately Hawkish Stance
The Bank of England’s November 7 decision to cut rates by 25 basis points to 4.75% came with an 8-1 vote, highlighting a conservative approach to easing. While the move was broadly anticipated, the upward revision in long-term inflation forecasts underscored the BoE’s belief in stickier price pressures. This outlook was tempered by downward growth revisions, with GDP for Q3 growing by just 0.1% versus 0.2% expected. Despite weak growth metrics, markets have only priced a 2s% chance of a December rate cut, reflecting the BoE’s focus on inflation over near-term economic softness.
Governor Bailey has repeatedly emphasized the importance of services inflation in determining the BoE’s policy path. While he refrained from defining what “gradual” means for future rate cuts, his cautious tone signals the Bank’s wariness of prematurely easing policy amidst lingering inflation risks. Wage growth data from November 12, which showed a stronger-than-expected 4.3% y/y increase, further complicates the inflation outlook.
What to Watch
For December’s BoE decision to remain in play, markets will focus on whether this week’s CPI data delivers a surprise. A reading in line with or above forecasts—particularly in services inflation—could solidify the Bank’s moderately hawkish stance and pare back rate cut expectations further. Conversely, a significant downside miss in CPI metrics could reignite discussions around a potential December cut, especially if paired with continued weakness in GDP or labor data.
Market Implications
Should inflation align with expectations or surprise to the upside, GBP could see renewed strength as markets adjust to a less dovish BoE. GBP/USD may face upward pressure, while Gilt futures could dip further. On the other hand, a downside inflation miss may bolster rate cut probabilities, potentially weakening the pound as traders position for a more accommodative BoE stance.
Ultimately, the Bank of England’s December decision hinges on data, with inflation metrics remaining the central focus. For now, the BoE continues to tread a cautious path, balancing sticky inflation risks with the need to support a slowing economy.