Inflation in the United Kingdom smashed expectations. Now, the question remains when the Bank of England will start cutting rates.
Inflation in the United Kingdom fell more than expected in January, hitting 4% in the face of a 4.2% market prediction. The figure represents a new 2-year low and the proof the UK’s fight against inflation is working.
When compared to its European peers, however, the UK still falls short. The Eurozone also saw a larger-than-expected fall in inflation in January, hitting 2.8%. Both the Bank of England and the European Central Bank use 2% as the ideal inflation target.
Core inflation - a measure that excludes volatile goods like food and energy - came in at 5.1% instead of the 5.2% forecast. Eurozone core inflation dipped to 3.3% in January.
Marion Amiot, senior European economist at S&P Global Ratings, welcomed the news and praised the UK for its fight against inflation. “The latest inflation print is another reflection of what is happening in the labour market: a tight labour supply is sustaining high wage growth and thus underlying inflationary pressures, especially in services,” she said.
Even while fighting inflation, the United Kingdom managed to strive off a recession, although markets widely expect a technical contraction in Q4 2023. Preliminary data will be released later this week. The UK utilizes a new method for measuring GDP growth with a larger focus on services, which allowed a better-than-expected revision of previous measurements.
The question of rates
Much like in the United States and in the European Union, the question now is when will the Bank of England start cutting interest rates. Since the COVID-19 pandemic, the BoE brought rates to 5.25%, significantly slowing down the economy.
The latest inflation reading might prompt the BoE to implement the first cuts already this summer. Markets also widely expect the ECB to do the same, perhaps even earlier.
According to the UK’s own estimates, inflation should reach the 2% target in the following months.
On the contrary, the US Federal Reserve might keep rates steady until the second half of the year. In the United States, inflation hovered around the 3% mark since last summer, without any noticeable progress. Instead, January CPI came in higher than expected in the United States.
On the other hand, the US economy is growing at a significantly higher pace than the UK’s or Europe’s ones. In the last quarter of 2023, GDP growth in the US doubled market expectations.
While US markets hope for some rate cuts already in June, they will likely be postponed in July or September. By then, European central banks will have likely pivoted already.
