Stronger-than-expected UK services inflation in April and May has dashed hopes for a June interest rate cut. Nevertheless, we anticipate the Bank of England (BoE) will maintain its stance that rate cuts are imminent if future data align with its forecasts. Following the latest inflation report, sterling regained strength, reaching $1.27 against the US dollar and staying above €1.18 against the euro. We do not foresee significant BoE-induced market volatility today unless the bank surprises investors.
Despite the headline CPI falling back to the 2% target for the first time since spring 2021, money markets have slightly reduced their bets on BoE interest rate cuts this year. This cautious stance is due to the key services inflation rate exceeding expectations, coming in at 5.7% versus the forecasted 5.5%. Along with election-related economic uncertainties, this is likely to keep the BoE from making any immediate changes, although we still predict the first rate cut in August. Given that the market currently sees only a one in three chance of this, sterling remains vulnerable. If the BoE policymakers' vote split is unexpectedly dovish, it could lead to a reassessment in a GBP-negative direction. However, high yields within the G10 currencies have supported sterling this year, and any BoE-driven decline in sterling may be brief if other central banks communicate and act similarly.
Today's meeting minutes will be crucial for understanding the BoE's interpretation of the latest data, as the bank has been silent since halting all communications following the UK election announcement last month.
