Inflation likely to put BoE back on rate hike cycle

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The Bank of England’s monetary policy meeting is scheduled for this week on Thursday. According to the economists polled and the market watchers, the UK’s central bank is expected to leave interest rates unchanged at this week’s meeting.

The central bank had last hiked interest rates in November 2017 by 25 basis points, bringing the interest rates to 0.50%. It was also the first rate hike after the UK voted to leave the EU.

The central bank was initially scheduled to hike rates in May. However, the weak patch of economic data in the first quarter and signs that the economy was further slowing kept the BoE on the back foot.

The first quarter GDP data from the UK showed that the economy had increased just 0.1% during the three months. However, officials were hopeful that subsequent revisions to the GDP would be higher.

Forward looking indicators such as the PMI’s covering the construction, services and manufacturing sectors suggested a sharp slowdown in the first month of the second quarter.

At the same time, wage growth started to show some growth as well.

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However, this was reversed following data that showed that activity across the manufacturing, services and construction sector might have hit a bottom. Although the signals were initially mixed, the rather mixed report was some sign of optimism.

Consumer prices on the other hand did not show any signs of let up. Higher fuel prices led to inflation staying steady at 2.4% in the year ending May 2018. Fuel prices alone increased 8% on the year ending May 2018.

The 2.4% increase marked the same pace of increase that was seen just the month before. The increase in consumer prices was broadly in line with the Bank of England’s forecasts.

However, the increase in fuel prices were offset by declines in other sectors. The UK’s inflation rate has been trending lower since peaking at 3.1% in November. This was at the same time that the Bank of England announced its first rate hike.

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Meanwhile, the tepid increase in short term interest rates was seen adding to the pressures on the housing sector. Data showed that official housing prices had continued to decline. The market in London managed to rise just 1.0% on the year in April. The decline came amid continued concerns about the outcome of the Brexit meeting.

The markets are heading into this meeting with the expectations that the central bank will remain on track for interest rate hike in August. Officials at the BoE are likely to weigh the facts to justify another rate hike in the backdrop of the weak economic growth.

A key factor that the Bank of England will consider is of course wage growth. Recent data showed that wages grew at a pace of just 2.5% including bonuses. This was a slower pace of increase compared to the 2.6% increase seen the month before.

However, marking an uncertainty about wages, the recent industrial production numbers confirmed that wages were easing. This comes amid the fact that despite a recent mixed outlook in the three main sectors of the UK’s economy, the underlining factor remained that wages and employment continued to ease.

For the moment, this week’s BoE meeting is likely to pass off as a non-event but market watchers will be positioning in anticipation of an August rate hike from the BoE.

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