The UK’s Bank of England will likely maintain interest rate stable for the foreseeable future.
June inflation in the United Kingdom was higher than expected, maintaining the previous reading at 2% year-on-year. The data was published by the country’s Official National Statistics office on Wednesday and was the first since the UK’s national elections on July 4.
A Reuters poll of economists showed that markets were expecting a drop in annual inflation to 1.9%. In particular, investors were hoping for a drop in services inflation, the UK’s largest driver of prices and GDP. However, service inflation increased by 5.7% annually, against expectations.
Core inflation, a more precise measurement that excludes volatile food and energy prices, came in at 3.5% in June.
The Bank of England’s inflation target is 2%, in line with most central banks of advanced economies around the world. Despite headline inflation reaching target ahead of economic peers, the BoE is considering holding off interest rates.
June inflation in the European Union and the United States was 2.5% and 2.9% respectively. Their core measures, however, came in at 2.8% in the Eurozone and 3.3% in the US, lower than in the United Kingdom.
That means inflation in the UK could edge higher in the coming months if the Bank of England doesn’t thread carefully with rates.
leggi anche
UK: a £10 billion hole is Labour’s first problem
GDP and interest rates
At their August 1st meeting the Bank of England will have to analyse several data, including a better-than-expected economic performance in the second quarter. The British GDP expanded more than forecast at 0.6%, bringing the country out of a slight recession.
A strong economy and sticky inflation are usually two solid indicators for holding interest rates. The BoE brought the pound’s rates to their 16-year high of 5.25%.
“It’s really not a done deal for August,” Jane Foley, head of FX strategy at Rabobank, told CNBC. “I think many of the members of the policy committee, and a lot of economists will be looking at that services sector inflation and worrying a bit.”
The UK economy is under the spotlight, especially after the recent general election. On July 4th, the Labour Party achieved a landslide victory against the ruling Tory Party, winning almost two-thirds of the seats in parliament.
The Labour’s agenda involves massive investments in infrastructure and industry decarbonization. One week into the new government, Prime Minister Keir Starmer approved a £7.3 billion investment fund for the green transition. Overall, the Labour Party is expected to abandon the austerity measures implemented by the Tories, focusing instead on economic growth.
