“With headline CPI inflation rising more than expected, to 3.0% in January, and forecast to increase this year, markets expect the Bank of England (BoE) to hold rates at 4.5% pa on Thursday. It’s true that some of the predicted rise in inflation is due to temporary factors, such as energy prices, but we think persistent domestic inflation pressures will influence cautious BoE messaging about the pace of future cuts. Average weekly private-sector wage growth (excluding bonuses) came in at 6.1% year-on-year in the three months to end January. This, in turn, has kept upwards pressure on service-sector inflation, which accelerated to 5.0% year-on-year in January.
“Additionally, while survey data point to employers cutting their hiring in response to the employer’s national-insurance increase announced in the October budget, the data also suggest that at least as many businesses intend to raise prices in response, which will further contribute to price pressures.
“The markets expect two more 0.25% pa cuts this year. We wouldn’t disagree strongly, given that rates remain in restrictive territory and the BoE sets policy based on inflation’s predicted path over the next few years, as opposed to where it is now. However, given the recent upside surprises in realised inflation and the upgrades to inflation forecasts, the UK’s central bank will be more cautious about consumers’ inflation expectations feeding back into wage negotiations and, therefore, prices. For these reasons, we think the risks skew towards the BoE delivering fewer rate cuts.”
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